■ 



*» 



mm mMm lllllii I 1 
mtitim MllllUllllIlfl 

\i ■:',■■■■■■■ ■ 



IB" 



■■HI 



i 



tM 



fm 11 



w 



llil 

IT 



ffllll 



Ml 

iii 



1111 



III 



11 



unni 



HUM 

■ 
IB 

1 






m 

mil 



(IHI II 

II 



n 
■I 



111 

111 



m 



n 



i 



F 



ill 

ill 



■ 



ill I f : 

i nil nil fj i nun iiiii 



i 



T 



H 



fltttt 



llll 

m 

'; luNffl 



Ulliiill 

IIIII 
II Bill 



mm 



■ 



isiniiuiu 



Hill 



■■^ 




Class H F SSi. L 
Book , S g r 

OopyrigMM . 






COPYRIGHT DEPOSIT. 



THE MECHANISM OF 
COMMERCIAL CREDIT 



THE MECHANISM OF 
COMMERCIAL CREDIT 

TERMS OF SALE AND TRADE 
ACCEPTANCES 



BY 

W. H. STEINER, Ph.D. 

ACTING CHIEF, DIVISION OF ANALYSIS 
AND RESEARCH, FEDERAL RESERVE BOARD 




D. APPLETON AND COMPANY 

NEW YORK : : 1922 : : LONDON 






COPYRIGHT, 1922, BY 

D. APPLETON AND COMPANY 



A683956 



PRINTED IN THE UNITED STATES OP AMERIGA 



OCI 31 IS22 
it* / 



TO 
M. F. D. 



PREFACE 

This book is addressed to the business man, the credit 
man, the banker, and the student. 

Men in all lines of business are daily called upon to de- 
cide whether they will pay cash for their purchases or in- 
stead will buy on credit. Conversely, they themselves are 
called upon to decide what terms they will offer to those 
who buy from them. These fundamental questions are all 
too frequently decided by the average business man with- 
out sufficient knowledge of the factors involved, and con- 
sequently without regard, in many instances, to the most 
advantageous and effective credit arrangements. The 
smaller business man who incidentally handles his own 
credits is naturally under the greatest handicap, but for 
those who devote their entire time to serving as credit men 
in larger houses knowledge of this kind is no less important. 
In fact, their study of the subject of commercial credit 
should be much more thorough. 

Bankers constantly require a knowledge of credit prac- 
tices in different lines of business. Furthermore, in grant- 
ing loans they must continually give consideration to the 
factors that determine these credit arrangements. In other 
words, they must have an intimate knowledge of the mech- 
anism of commercial credit and the manner in which it 
operates. Not only is this true directly for their daily 
tasks, but from a broader point of view such knowledge is 
no less necessary in order to enable them to understand 
the relation of the bank to commercial and industrial life. 

Students of business are paying increasing attention to 
the role that commercial credit plays in the modern busi- 

vii 



viii PREFACE 

ness structure, and a growing number of colleges and 
schools of business are offering courses that, wholly or in 
part, are devoted to a study of the subject. 

The reader will find in this book both a summary of credit 
practices in leading industries and an analysis of govern- 
ing principles. "The reason why" need not invariably be 
difficult to understand, and it is a necessary complement 
to description of practice. Neither aspect can be neglected. 
Effort has been made throughout to illustrate the princi- 
ples by reference to the situation in typical industries. 

Equally important with this analysis of the factors at 
work in the present commercial credit structure is an an- 
swer to the questions: How satisfactory is the present 
system? Should it be modified or supplemented, and if 
so, how ? This raises the entire question of the trade-accept- 
ance system v. the cash-discount system, which has been 
in the forefront of discussion for the past five years or 
more. Every business man, banker, and student must form 
an opinion on this question. Previous discussion, too, has 
been largely partisan, and has not clearly indicated the 
underlying principles. In the present work effort has been 
to deal with these features in a clear and concise manner, 
and to indicate as definitely as possible the conclusions to 
which this analysis must lead. 

In preparing the book the writer has drawn upon vari- 
ous sources for his information. The discussion of terms 
in leading industries in Part III is based upon studies 
made by him for the Division of Analysis and Research of 
the Federal Reserve Board, in the course of which data 
were obtained from a large number of business houses and 
trade associations. Each section relative to conditions in 
a particular line has been submitted to an authority in 
that industry, as indicated at the appropriate places in 
Part III. Acknowledgment is due to each of the gentle- 
men there mentioned. The writer is also greatly indebted 



PREFACE ix 

to Mr. H. W. Strong, secretary of the Strong, Carlisle & 
Hammond Company, Cleveland ; Mr. Sidney Y. Ball, presi- 
dent of the Norris, Alister-Ball Company, Chicago; and 
Mr. Philip Hamburger, Jr., treasurer of Henry Sonneborn 
& Company, Inc., Baltimore, for kindly reading Part I, 
dealing with the factors governing terms. In connection 
with Part II, dealing with the trade acceptance, he is in- 
debted to Mr. John S. Jenks, Jr., of Philadelphia, and Mr. 
W. W. Orr, assistant secretary of the National Association 
of Credit Men. Their suggestions, while reflecting oppo- 
site views of the question, have materially improved the 
work. 

The writer is also greatly indebted to Dr. H. Parker 
"Willis, Professor of Banking in Columbia University; Dr. 
Frederick B. Robinson, Dean of the School of Business and 
Civic Administration of the College of the City of New 
York; and Dr. George W. Edwards, Assistant Professor of 
Banking in Columbia University, who have read the entire 
manuscript and made many helpful suggestions. The opin- 
ions expressed in the work, needless to say, are entirely 
personal, and have no official significance. 

W. H. S. 



CONTENTS 

PAGE 

Introduction 3 

Meaning of terms of sale 3 

Getting working capital 4 

The commercial credit system 5 

Analysis of the system 6 

Relation to banking 9 

Scope and purpose of the work 10 

Sources of data as to terms 11 

Previous studies 12 

Divisions of the work 13 



PART I 

FACTORS GOVERNING TERMS 

II. Length of Net Terms 17 

The fundamental factor 17 

Nature of the article 19 

"Pay-day" terms 22 

Customary settlement dates 24 

Geography of terms 24 

Terms on manufacturers' raw materials ... 25 

Terms on fixed capital goods 26 

Carrying the purchaser 27 

Terms in retail trade 29 

The marketing period in relation to the bank . 29 

The marketing system 30 

Some illustrations 31 

The wholesaler's credit function 34 

Manufacturers' and wholesalers' terms ... 35 

III. Length or Net Terms (Continued) 38 

General competitive conditions 38 

Relative size of buyer and seller 39 

Competition or concentration among buyers and 

sellers 39 

Cash outlay, profits margin and capital position of 

the seller 42 

Trade-marked goods 44 

Regularity of relationship between buyer and seller 45 
xi 



xii CONTENTS 

PAGE 

Business character of each 47 

General illustrations . 47 

Mutual interrelation of terms 50 

Terms of the individual house 52 

How the net period is covered , 53 

IV. Datings 56 

Season datings 56 

Advantages to the seller 57 

Illustrations 59 

One-season industries 60 

Frequency of purchases 62 

Indirect datings 63 

Shipments to distant territories 64 

Competitive or extra datings 65 

Datings not rigid 66 

Grouping of transactions 67 

V. Cash Discounts 69 

Cash discounts and trade discounts .... 69 

Nature of the cash discount ....... 71 

Relation to terms 72 

Function 73 

Length of the cash-discount period 75 

Methods of quoting 76 

Size of the discount 78 

The credit risk 79 

Position of the seller 80 

Net terms 81 

Low discounts 82 

High or competitive discounts 83 

Department store discounts 84 

Graded discounts 84 

Anticipation rates and past-due rates .... 86 

VI. Terms in Relation to Business Conditions . . 88 

The business cycle 88 

Terms and general business conditions ... 89 

Movement of terms in particular industries . . 91 

Discounts and business conditions 92 

Wartime changes 94 

Types of changes 95 

The tendency to shorten terms 98 

The movement to standardize terms .... 101 

Wholesalers' interest in terms 103 

Buying and selling terms of wholesalers . . .106 



CONTENTS xiii 

PART II 
THE TRADE ACCEPTANCE QUESTION 

PAGE 

VII. The Trade Acceptance Movement in the United 

States 113 

Meaning of the trade acceptance 113 

The trade acceptance before and after the Civil 

War 114 

The trade acceptance and the Federal Reserve Act 115 

Work of the Federal Reserve Board .... 117 
The trade acceptance movement — the National 

Association of Credit Men 120 

The American Trade Acceptance Council . . . 122 

Work of the bankers 124 

The American Acceptance Council 126 

Trade associations and the trade acceptance . . 128 

Opposition to the trade acceptance 130 

The post-war period 133 

Trade acceptances at Federal Reserve Banks . 136 

VIII. Extent of Use op Trade Acceptance .... 139 

Surveys of the use of the acceptance .... 140 

The Federal Reserve Board inquiry of 1917 . . 141 

Inquiries of trade-acceptance advocates in 1918 . 143 

Investigation of Messrs. Paine and Jenks . . 144 

Survey of 1918 147 

Investigation of Park Mathewson in 1921 . . 148 

Present use of the trade acceptance .... 149 

IX. The Net- Terms System versus the Cash-Dis- 
count System— Credit Aspects .... 153 

Alternative systems of finance 153 

The net-terms system and the trade-acceptance 

system 155 

The problems involved 156 

Fundamental tests 157 

Agency for credit measurement 158 

Relative merit of seller and bank 160 

Checking of credit by the local bank .... 161 

Analysis of types of industries 164 

Method of credit measurement by the bank . . 166 

Collection of accounts 169 

X. The Net-Terms System versus the Cash-Dis- 
count System — Social and Banking Aspects 173 
Effects upon business practice 173 



xiv CONTENTS 

PA9B 

Composition of the business community . . . 175 

Relation of the borrower to the bank .... 176 
Automatic elasticity of volume of commercial 

paper 177 

Effects upon general prices 179 

Prices of particular goods 179 

The discount market 181 

Conclusions 182 



PART III 

TERMS NOW IN USE 

XI. The Foodstuffs Industries 187 

Meat packing 188 

Canning 190 

Flour milling 192 

Sugar refining 196 

Coffee, tea and spices 197 

Confectionery 198 

Tobacco manufactures 199 

Wholesale groceries 200 

XII. The Metal Industries 208 

Iron and steel . 209 

Copper, lead and zinc 211 

Hardware 215 

Mill supplies and "machinery" 224 

Machinery 227 

Railway equipment 229 

Shipbuilding 230 

XIII. The Automotive, Agricultural Implement, Elec- 

trical and Fuel Industries 232 

Automobiles 233 

Rubber goods 237 

Automobile accessories 240 

Agricultural implements 242 

Electrical products 254 

Coal and coke 257 

Petroleum 262 

XIV. The Textile Manufacturing and Dry Goods In- 

dustries 268 

Cotton 269 

Silk 27^ 



CONTENTS xv 

PAGE 

Woolen and worsted 279 

Hosiery 285 

Knit underwear 287 

Laces and embroideries 288 

Wholesale dry goods 290 

Men's wear woolen and worsted jobbing ~ . . . 300 

XV. The Appaeel and Leather Industries .... 303 

Men's clothing 304 

Women's outer garments 309 

Fur manufacturing . 314 

Millinery 316 

Tanning 319 

Boots and shoes 325 

XVI. The Lumber and Miscellaneous Manufacturing 

Industries 331 

Lumber 332 

Office furniture and store fixtures 338 

Paint and varnish 340 

Glass and glassware 341 

Jewelry 343 

Optical merchandise 348 

Wood pulp and paper 349 

Drugs and Medicines 355 

Appendix. Tabular Statement of Terms of 

Sale 362 



THE MECHANISM OF 
COMMERCIAL CREDIT 



THE MECHANISM OF 
COMMERCIAL CREDIT 



CHAPTER I 

INTRODUCTION 

The outstanding feature of modern industry is the long 
period of time between the extraction of raw materials and 
their final delivery in some useful form to the consumer. 
Production is not a simple, direct, hand-to-mouth process. 
It is complex and roundabout. No article is completely 
produced until it is ready for use by the ultimate consumer. 
Production consists of a long series of steps, processes or 
stages and involves many men and operations, many ex- 
changes and bargains, many transfers and handlings of 
goods. All this takes time. Parallel with this technical 
phenomenon of production is the financial phenomenon of 
credit. By credit we mean the accommodation which one 
concern extends to another when it gives valuable things in 
the present in return for a claim to be paid or discharged 
in the future. There is no credit in a barter and no credit 
in a cash exchange. Credit does not enter where transac- 
tions are fully closed in the present. 

Meaning of Terms of Sale. — When a buyer receives 
goods from a seller on condition that he will pay for them 
in the future, a credit relationship is established. Usually 
it is established upon some definite basis, and is expressed 
in the terms of sale which are quoted. Technically, the 

3 



4 THE MECHANISM OF COMMERCIAL CREDIT 

terms of sale specify the time and general conditions of pay- 
ment by the buyer. They usually consist of two parts: 
the one part, a certain period of time, such as 60 days, 
within which payment of the amount of the bill is due, 
without being subject to any deduction; the other part, a 
certain period of time, usually 10 days, for payment within 
which the deduction of a specified cash discount, such as 2 
per cent, is permitted from the amount of the bill. The 
terms then generally include both cash discount and cash 
discount period, and net terms. Using the illustrations 
just cited, they will be quoted, for example, as 2 per cent 
10 days, net 60 days. 

Certain expressions with respect to terms are usually 
employed. Terms in each different line of business are 
relatively uniform, so that certain terms exist in such cases 
which are recognized as "regular." They may be "recom- 
mended" by trade associations in the particular line and 
stage, and may call for extra time, or what is known as a 
"dating," in addition to the net terms which would other- 
wise be quoted. 

But terms of sale cannot be considered as isolated matters. 
They are inextricably interlocked with many other financial 
and industrial matters. They are intimately related to the 
financial problems which every business house must face; 
and they are an integral part of the general credit system. 
Both of these in turn react upon and influence the banking 
system. In other words, finance, credit and banking are all 
closely joined together, and terms of sale provide one of 
their mainsprings. As a result, terms have many ramifica- 
tions and raise many collateral questions, relating to various 
parts of this large field. It is necessary to set them in their 
broader framework in order to obtain a clear understanding 
of their real meaning and significance. 

Getting Working Capital. — Consider a medium sized or 
small business man who has issued neither stocks, bonds, 



INTRODUCTION 5 

nor long term notes, and who does not sell his paper in the 
open market. In case his own funds are insufficient, he may 
obtain the working capital which he needs for his ordinary 
operations in one of two ways. He may either borrow from 
his bank in order to pay wages and other incidental ex- 
penses, and to pay cash for goods which he buys, or else he 
may buy these goods on time instead. When he does the 
latter, he owes the man who has sold him the goods, and not 
the bank. Although credit is granted in both cases, in the 
one it is commercial credit ; in the other, bank credit. 

A great variety of factors determine which of these two 
courses the individual business man will follow. This is 
true even of the relative extent to which the same man will 
use each of them, and buy a part of his goods on time 
instead of paying cash with funds which he borrows from 
the bank. In large measure, these factors relate to the 
peculiar conditions which surround his individual business, 
but in many ways practice is the same for all those engaged 
in a certain kind or class of business. 

The Commercial Credit System. — Consider now business 
houses as a whole, instead of the individual business man. 
Some houses buy for cash and merely owe the bank, while 
others buy only on time and thus owe other business houses 
instead. The great majority perhaps do both, and buy to 
some extent in each way — part for cash and part on time. 
They likewise sell part for cash and part on time, granting 
other business houses the option of paying in either way 
which they themselves are granted when they buy. Each 
house thus has certain credit relations with other houses. 
Taken together, these credit relations between the different 
houses constitute the commercial credit system. 

This system is almost as widespread as our entire eco- 
nomic life and economic activity. Through it the tremen- 
dous volume of business in modern economic life is made 
possible. It serves to effect the exchange of these masses of 



6 THE MECHANISM OF COMMERCIAL CREDIT 

goods — goods which are produced under a system of di- 
vision of labor wherein each individual and each group of 
men engage in that occupation for which they are relatively 
best qualified. The system serves also to bind together the 
various business houses, and to create among them extensive 
and intricate interrelations and interdependence. No one 
can stand alone, but each is intimately related to other 
houses, so that disaster to one often carries in its wake 
disaster to many others. 

Analysis of the System. — The system is not so complex 
as it may appear to be at first sight. The fundamental 
features are relatively simple and there is underlying uni- 
formity in certain directions. The credit relations of 
certain definite groups of houses are similar, and the system 
may thus be resolved into several component parts. To do 
this, it is necessary first to analyze the economic process 
whereby goods are produced and then moved from maker 
to ultimate consumer. 

The economic process when taken in cross section reveals 
several distinct stages. Some men are engaged in produc- 
ing raw materials, either of mineral or agricultural nature ; 
others fashion these materials into more or less finished 
articles, which they may in turn resell to still others who 
further manufacture them. The spinner sells cotton yarn 
to the cloth manufacturer, who may merely make grey goods 
and sell them to the converter, who in turn produces 
finished cloth. Merchants may next purchase this cloth and 
resell it to retailers, who in turn dispose of it to the final 
consumer. The extent and number of these stages of course 
vary greatly. There are middlemen who deal in various 
agricultural products, while articles serving as producers' 
goods, such as machinery, are often sold direct by manu- 
facturers to those who use them as part of their plant 
equipment. On the whole, however, the major stages are 
quite clearly defined for any one line of business. In gen- 



INTRODUCTION 7 

eral, they may be considered as (1) extraction, (2) manu- 
facture, (3) wholesale trading and (4) retail trading. Each 
type of product passes through the economic process in what 
is the regular fashion for its line, and spends a certain 
average length of time in passing through each of the 
stages. 

* Each stage has fairly well defined credit relations with 
the other stages which are adjacent to it in the process. 
Most conspicuous, perhaps, is the wholesaler and his rela- 
tions, on the one hand, with the manufacturer from whom 
he buys and, on the other, with the retailer to whom he 
sells. As is generally known, he usually buys for cash and 
sells on time. These credit relations also imply certain 
definite relations on his part with the banking system. He 
must borrow from the banks for a two-fold purpose — in 
order to pay cash for his purchases, and in order himself 
to extend credit to his customers. Similarly, every other 
stage has its own definite relations. At the commencement 
of the economic process, for example, raw materials are 
sold for cash by producers, and buyers thus resort directly 
to the banks for the funds they need. Likewise, at the 
close of the process, consumption goods are sold at retail 
in considerable measure for cash, so that the retailer does 
not have to borrow from the bank to so great an extent in 
order to extend credit to his customers. In short, every 
stage has its own definite credit and banking relationships. 
These relationships are similar in a general way for certain 
types of business, according to the stage in the economic 
process in which they belong, and irrespective of the partic- 
ular goods which each produces or handles. The credit 
and banking problems of a hardware wholesaler are similar 
to those of a wholesale grocer — more similar in many ways 
than are the problems of the wholesale grocer to those of 
the canner who sells to him. 
But at the same time those engaged in any given line of 



8 THE MECHANISM OF COMMEKCIAL CREDIT 

business are subject to the same influences. The hardware 
manufacturer, the hardware wholesaler and the hardware 
retailer are all affected by the ultimate demand for their 
product. The manufacturer sells to the wholesaler, who in 
turns sells to the retailer, and there is thus a definite con- 
tinuity and interdependence between them. Each stage 
dovetails with and fits into the other. This applies more 
particularly to the credit than to the banking problems, 
and the latter feel the influence somewhat indirectly. In 
any event, however, it is useful to make a two-fold classifica- 
tion according to the kind of credit and banking problem 
which is experienced — either according to the stage in the 
economic process, or else according to the line of business. 

The apparent complexity of the process in actual life 
should not be permitted to obscure the simple fundamental 
features which lie back of it, and have just been explained. 
Significant for an understanding of the commercial credit 
system is a two-fold division of the economic process, ac- 
cording to lines of business and according to stages. The 
credit and banking problems of any individual business man 
are in considerable measure determined for him, rather than 
~by him, according to the line and stage in which he finds 
himself. Each line and each stage has its definite problems. 
With respect to any one line of business, the interdepen- 
dence of the successive stages in that line is perhaps most 
striking. From the credit point of view, the length of time 
which the article passing through the process remains in 
each stage is of special importance inasmuch as it fixes an 
upper limit to the time for which any one stage should be 
granted credit. This will be seen more fully in Chapter II. 
From the banking as well as from the credit 'point of view, 
the peculiar problems which are found in certain stages, 
notably the wholesale stage, are perhaps most striking. 
However, neither division, by stage or by line, can be neg- 
lected, and each forms the logical complement of the other. 



INTRODUCTION 9 

Relation to Banking. — From the point of view of its 
relation to banking, the question of the terms employed 
and hence the structure of the commercial credit system, 
raises in the first place the question how the paper of the 
merchant or manufacturer gets into the banks. The pri- 
mary question is this : whose paper is it — that of the buyer 
or of the seller, and in what form is it? Where cash is 
paid, and the buyer discounts his bills instead of paying 
only at the close of the net period, the buyer goes directly 
to the bank and borrows from it. Where he instead takes 
the net terms, the seller must carry him and extend the nec- 
essary credit. To do this, however, the seller must go to 
his bank and either discount the note or acceptance which 
he may have received from the buyer, or else borrow on 
his own paper in order to obtain these funds. In the first 
case the buyer goes directly to the bank, while in the second 
case the seller goes to the bank and borrows from it the 
funds which he in effect loans to the buyer when he sells 
goods to the latter on time. In the first case, the bank 
has the buyer's paper; in the second case, it has 
either the seller's paper, or the buyer's paper endorsed by 
the seller. 

In actual practice in the United States to-day, buyers are 
given the option of paying cash or taking time. Thus they 
naturally divide themselves into two classes according to 
whether or not they either possess themselves or can obtain 
from the bank sufficient funds to enable them to pay the 
seller cash. The proposals which have been made to reform 
the present credit system and to introduce widespread use 
of the trade acceptance in last analysis, however, involve 
the use of a system of net terms only, under which no option 
is granted to the buyer, and paper reaches the banks only 
from the seller. The relative merits of each will be con- 
sidered fully below. At this point it can merely be 
indicated that there is involved the further question 



10 THE MECHANISM OF COMMERCIAL CREDIT 

"whether better credit measurement is obtained under the 
one system than under the other. 

In the second place, the terms employed raise the question 
of the length of time for which the bank shall make its 
advances. The period of credit which it grants parallels 
the period of mercantile credit, and both are based on the 
length of time for which the borrower or buyer, as the case 
may be, requires the funds. This, as indicated above, is 
determined by the length of time which the article he 
handles takes to pass through his stage of the economic 
process. The terms of sale are important from the point of 
view of the bank in this way as well as in the way just 
indicated. 

Scope and Purpose of the Work. — The framework upon 
which the present book is built is provided by the commer- 
cial credit system described above. This system constitutes 
our subject of study, and is to be considered from several 
different points of view. Throughout the system terms of 
varying descriptions are in use. But throughout the struc- 
ture of terms which exists, certain forces are at work to 
determine the terms which shall be used under any given 
conditions. It is not mere chance that manufacturers sell 
men's straw hats on a single season dating, while wholesale 
grocers usually sell their goods on terms of 1 per cent 10 
days, net 30 days. Nor is it mere chance that cash discounts 
as high as 7 per cent are found in various branches of the 
textile industry, while manufacturers of iron and steel 
products do not grant discounts in excess of 2 per cent. 

The first purpose of the present work is to consider the 
forces which govern the terms now in use, and which de- 
termine what the terms shall be in each line and stage, and 
in each individual case. These forces are clearly susceptible 
of analysis, and may readily be discovered. They are con- 
cerned in large part with the merchandising and general 
business practices which prevail. They relate both to the 



INTRODUCTION 11 

length of the net terms (including the datings granted) and 
to the size of the cash discounts quoted. In addition to 
explaining why the regular terms in any given industry are 
employed, they serve also to explain the deviations from 
these terms which are found in the case of some individual 
houses. However, the standard or regular terms which are 
the result of these forces themselves vary over a series of 
years in response to changes in general business conditions, 
and attention will also be paid to the manner in which this 
variation takes place. 

The second purpose is to evaluate critically the present 
structure of terms in so far as it relates to the present com- 
mercial credit system. Various efforts at, and proposals for 
reformation of the system have been made in recent years, 
and these strike at the very fundamentals of the system. 
Is our present cash-discount system good, bad or indiffer- 
ent? Has it outstanding weaknesses, and if so, how, if at 
all, may they be remedied? Is it worth while to attempt 
to remedy them? Do its defects exceed its merits, and, 
furthermore, is there another and superior system available 
to supplant it? How does this system compare, point for 
point, with the cash-discount system? Should the cash- 
discount system be discarded and the new system — the net- 
terms or trade-acceptance system — be put in its place ? 

Sources of Data as to Terms. — To answer both these sets 
of queries, requires the use, as far as possible, of an induc- 
tive method. This calls, in the first place, for comprehen- 
sive data as to the existing terms situation and as to mer- 
chandising and business practice in so far as it bears on 
terms. These have been carefully prepared for leading 
groups of industries, so as not only to show the existing 
situation, but also to illustrate the application of the 
forces which govern terms. They are presented in Part 
III, Chapters XI to XVI inclusive, of the present work. A 
comprehensive body of actual fact, therefore, provides the 



12 THE MECHANISM OF COMMERCIAL CREDIT 

basis for the present study. These data have been care- 
fully analyzed from the points of view indicated in the 
preceding section. 

The data, however, are limited in certain directions. 
Terms in import and export trade are not included, but 
domestic trade alone is considered. Neither are terms on 
agricultural produce and other absolutely raw materials in- 
cluded, and terms in retail trade are also omitted. Where 
reference is made to these fields, it is necessarily general 
in character, and the major part of the illustrations are thus 
drawn from the other fields for which detailed and specific 
data are available. The general forces which ^re discussed, 
however, are universal in their application and apply 
equally to both fields. 

Previous Studies. — Little help may be obtained from 
previous studies of the subject of terms. They are gener- 
ally both scattered and fragmentary, and fall roughly into 
two classes: (1) statements of terms in a number of lines, 
and (2) discussions of the situation in a particular industry. 
Most of the regular works on credits and collections devote 
a few pages to the subject, usually, however, only to indi- 
cate the nomenclature. At most, a chapter is devoted to a 
brief discussion of principles and a statement of the situa- 
tion in a few leading lines, as, for example, in Volume 8 of 
the Modern Business Series of the Alexander Hamilton 
Institute. The Credit Monthly, and its predecessor, the 
Bulletin of the National Association of Credit Men, con- 
tain a few brief statements, and so also does Rinsfoos' 
book on Purchasing. Some material may also be found 
in various other scattered works, such as the Banking Law 
Journal Year Book for 1915, on Commercial Paper and 
Bills of Exchange, and Kniffin, Commercial Paper. 

In general, however, these works have the defect of being 
mere statements of facts with respect to regular terms. 
Little or no attempt is made to analyze and indicate the 



INTRODUCTION 13 

factors which determine what terms shall be employed, and 
in most cases no marketing and other data necessary for 
an understanding of the terms are appended. Analysis 
is found to a greater extent in discussions of terms in a 
given industry. Prominent among this class of works are 
addresses, reports of committees on terms, and discussions 
at trade association conventions, as well as discussions at 
group meetings at the conventions of the National Associa- 
tion of Credit Men. From time to time, articles also appear 
in trade and less frequently financial journals. The former 
also contain, at times, statements of the pojicy of individual 
business houses as to terms. Certain studies dealing with 
particular industries also consider the problem at greater 
or lesser length. Among these may be mentioned Onthank, 
The Tanning Industry and Dodd, Lumbering, both pub- 
lished by the Robert Morris Associates, several studies of 
the Miscellaneous Series of the Bureau of Foreign and 
Domestic Commerce, for example, No. 34, relative to men's 
clothing, several of the studies of the Federal Trade Com- 
mission, especially those on agricultural implements, and 
Cherington, The Wool Industry. In all of these, consider- 
able data as to marketing are included. 

The above discussion relates solely to the question of ma- 
terial on the existing terms situation. With respect to 
reforming the commercial credit system, there has been a 
great body of literature relative to the trade-acceptance 
and cash-discount systems in recent years. This will be 
indicated at the appropriate place in Part II. 

Divisions of the Work. — In view of the considerations 
noted above, the present work will be divided into three 
principal parts. The first part will analyze the existing 
structure of terms from the point of view of the forces 
which operate throughout that structure to determine the 
terms in use. In Chapters II to V inclusive, the forces will 
be successively indicated which determine the standards as 



14 THE MECHANISM OF COMMERCIAL CREDIT 

to length of net terms and datings, and the size of the cash 
discounts which are granted. Chapter VI will consider the 
forces which cause the standards or regular terms them- 
selves to change in harmony with changes in general 
business conditions. In all six chapters, illustrations will 
be drawn from various lines to show the operation of each 
of the forces or factors which are discussed. 

Chapters VII to X inclusive will carry out the second 
purpose of the present work. Chapters VII and VIII will 
afford a background by treating specifically of the present 
use of the trade acceptance and indicating its growth in 
recent years. After this, the present structure of terms 
will be considered from a critical point of view and con- 
trasted with the net-terms trade-acceptance system which 
has been strongly advocated in some quarters in recent 
years. In drawing these contrasts, the several questions 
already mentioned will be considered in detail. 

Finally, the third part of the work will be primarily de- 
scriptive in character. It will afford a comprehensive state- 
ment of the terms actually in use, and will also enable the 
reader to observe the operation of the forces indicated in 
Part I. Chapters XI to XVI inclusive will therefore give 
a description of the present terms situation in leading 
groups of industries. In these chapters both terms and the 
marketing situation in so far as it relates to terms will be 
presented. These chapters are based upon material pre- 
pared by the writer which appeared in various issues of 
the Federal Reserve Bulletin in 1919 and 1920. 



PAET I 
FACTORS GOVERNING TERMS 



CHAPTER II 



LENGTH OF NET TERMS 



In proceeding to analyze terms of sale, it is necessary 
to commence with the net terms. As will be seen later, the 
cash discounts are intimately related to them, while, further- 
more, similar factors are at work in both cases. These 
factors determine both the length of the net terms and the 
size of the cash discounts which are granted. With respect 
to the length of the net terms, the factors consist chiefly 
in an elaboration of three central points. They operate 
throughout the economic process as a whole, and irrespective 
of the particular industries in question. They operate in 
retail trade as well as wholesale, and in the case of wheat as 
well as machinery. Each of the three factors will be con- 
sidered in turn. 

The Fundamental Factor 
To understand the fundamental factor governing the 
length of the net terms, goods should be divided into several 
classes. First are articles bought either to work up or to 
resell in the same form. They serve the purchaser — 
whether manufacturer or merchant — as circulating capital. 
They are destined to be turned over within a relatively 
short period of time and thus be converted into cash, with 
which payment may be either made for them or other goods 
may be purchased, and the cycle repeated. Second are ar- 
ticles which are bought for use by the purchaser as fixed 
capital, as, for example, machinery. It yields "only a 
relatively small return year by year, so that the purchaser 
must either have the funds to pay cash for it, or else obtain 

17 



18 THE MECHANISM OF COMMERCIAL CREDIT 

a definite loan of capital. The machinery itself cannot 
provide the funds. Third are articles in the hands of the 
retailer in final form ready for consumption. The consumer 
either pays cash from funds on hand, or else defers payment 
until the next pay day. Obviously, the articles themselves 
do not provide the means of payment. Each of these three 
classes of goods requires separate treatment, and will be 
discussed in succession. 

In order to simplify the discussion, consider first articles 
bought for resale. In any given transaction, when is the 
buyer able to pay the seller for the goods which he has 
purchased? When he has funds in hand. Assuming that 
the capital which he has invested in his business is fully 
employed, this depends upon the time when he not only sells 
the particular article which he has purchased, but when he 
himself receives payment for it from the person to whom he 
in turn has sold it. He must wait until he himself receives 
payment before he can in turn pay his own bill. In other 
words, his ability to pay depends upon the rapidity with 
which he turns over the goods, or rather the capital which 
the goods represent. In technical economic language, this 
period or interval between the incurring of cost and the 
receipt of payment when sold may be termed his marketing 
period. For the individual buyer, it may reasonably and 
naturally become accepted as the standard for the length 
of the net terms which he is granted. 

This analysis may be carried one step further. In the 
case of any given article, the buyer's marketing period 
ultimately depends upon how rapidly the final consumer 
buys the article. He fixes the rate of consumption, and 
this is reflected back to each of those who handle it in 
turn. 1 The slowing up in the distribution of goods in 1920 
as a result of the buyers' strike, with its drop in sales and 

'■It is also reflected back ultimately even to the machinery which 
produces the article in question. 



LENGTH OF NET TERMS 19 

accumulation of inventories by manufacturers and whole- 
salers as well as retailers, clearly illustrates this. 
In other words, in last analysis, the length of the net terms 
in any one stage — whether manufacture, mercantile or re- 
tail — and the buyer 's marketing period, are but a reflection, 
perhaps modified somewhat under certain conditions, of 
what may be termed the consumption period for the partic- 
ular article in question. This is the fundamental economic 
factor. It is reflected more immediately in any one stage 
through the buyer's marketing period. The manufacturer's 
technical production period — the time required for the 
manufacture of the article in question — is entirely subordi- 
nate to the marketing period. The aim of the technician is 
merely to have the production period not in excess of the 
marketing period. 

But this is by no means the entire story. The principle 
or factor may be applied in a variety of ways, and more- 
over, as will be seen later, it merely tends to set an upper 
limit to the length of the net terms, instead of absolutely 
fixing their length. It is therefore necessary first to illus- 
trate the various applications of the principle, in order to 
see exactly how it operates. It should be remembered, 
however, that it is exceedingly difficult to obtain examples 
where other factors are absent and which, therefore, show 
merely the influence of a single factor. Thus the use of any 
particular illustration implies that the factor in question is 
powerful enough to be observed in the selected case, rather 
than that it is the sole factor in operation. 

Nature of the Article. — Both the consumption period 
and the marketing period in any one stage vary with the 
nature of the article. Four points must be considered : (1) 
whether the sale involves a large or a small amount; (2) 
whether the article is preservable or perishable; (3) 
whether it is standardized or subject to changes in fashion 
or style; and (4) whether it is for seasonal or for recurrent 



20 THE MECHANISM OF COMMERCIAL CREDIT 

use. The article, moreover, may either merely turn over 
slowly, or, in other cases, may involve considerable risk and 
not be sold at all, thus becoming a total loss. 

1. The influence, especially to the consumer, of the 
amount involved in the sale, is seen when contrasting a 
house, automobile, piano or diamond ring with a newspaper, 
box of candy or alarm clock. The contrast has been well 
drawn by Mr. S. Y. Ball in the following language : 2 

Cash is readily available for the small purchase; but as the 
amount involved increases and becomes sizable, we reach and pass 
beyond the consumer's immediate financial ability. Time in which 
to accumulate further money is necessary — so terms are arranged 
— and months, even years, are granted the purchaser within which 
gradually to pay over the sale price. So that, in the jewelry 
business, those who specialize on merchandise involving large 
amounts, notably diamonds and diamond jewelry, very properly 
prepare to help finance the long time required by the ultimate 
consumer to complete payment. On the other hand, our friends 
who have made the alarm clock a profitable small sale for the 
jeweler, with equal propriety ask and receive payments practically 
spot cash. 

Similar, though far less striking, are the reasons under- 
lying the terms on canned goods. They are, as a rule, 
bought in quantities to cover requirements of a longer 
period of time than, say, meats, and hence carry longer net 
terms (30 days, or less frequently 60 days) in order to 
induce their movement in larger quantities. 

2. The effect which the degree of perishability has upon 
the terms is well illustrated in the case of meats. Packers 
usually sell fresh meats to retail dealers on a weekly basis, 
and in some cases they collect by a specified day of the 
week for all deliveries during the preceding week. On the 
other hand, cured meats and canned meats are sold to a 
considerable extent on 30-day terms. On a distinctly 

2 Eeport of the! Committee on Terms and Discounts, National 
Wholesale Jewelers' Association, presented at the June, 1920, con- 
vention. 



LENGTH OF NET TERMS 21 

perishable article, especially if the buyer does not possess 
much financial strength, terms cannot very well be long if 
the seller may have to take back the merchandise in the 
event of non-payment of his bill. 

3. The degree of standardization has a complex influence 
upon terms. Standardization, as Mr. Ball notes in the 
report just quoted, may refer either to price or to quality, 
while in another sense distinction between standard and 
non-standard goods is paralleled roughly by the distinction 
between luxuries and necessities. In ordinary times stand- 
ard goods may be purchased as needed from day to day. 
Hence, to draw an illustration from the jewelry industry, 
American watches and clocks and sterling and plated silver- 
ware are sold on short terms. Manufacturers, in general, 
grant one month to wholesalers on all these items except 
clocks, where terms range from 10 to 30 days. Further- 
more, when such lines are advertised and the customer is 
educated in advance as to price and quality, less need 
exists for stocking up such merchandise for purposes of 
display and selection. On the other hand, non-standard 
goods need to be stocked, arranged, examined and discussed 
as to price and quality. The ultimate customer makes his 
selection when it is convenient for him, and makes it from 
the goods which the dealer displays. Terms must be 
lengthened correspondingly, and in the jewelry business 
diamonds, watches and imported jewelry, therefore, require 
longer terms. Only as the goods are delivered by the seller 
at the time they are wanted by the buyer, will shorter terms 
normally be found. Absence as far as possible of stocking- 
up of merchandise, such as women's apparel, by the seller 
in fact is found largely in lines where the style risk is 
great. This, however, raises the entire question of the 
system whereby the article is marketed, to be considered in 
more detail later. 

4. Several of the factors just indicated point to the 



22 THE MECHANISM OF COMMERCIAL CREDIT 

difference between seasonal and current use of the mer- 
chandise. Goods sold for current use do not remain long 
in the hands of the buyer, and so he is not entitled to long 
terms. Packers, for example, very properly, rarely grant 
terms longer than one week on fresh meats. Again auto- 
mobile tires during the spring and summer are promptly 
resold by dealers, and carry terms of 5 per cent 10th prox- 
imo (tenth day of the following month). During the winter, 
however, dealers accumulate a stock of tires, and receive 
a spring dating in order to enable them to make sales and 
collections with the advent of the new season. The influ- 
ence of this factor is even more pronounced in an industry 
which has but one season a year. Manufacturers of men's 
straw hats therefore sell to jobbers on a May 1 dating and 
to retailers on a June 1 dating. Terms on goods for seasonal 
use, however, involve the entire question of datings, which 
will be treated in detail later. 

When viewed in a somewhat different way, the nature 
of the article may be more specifically related to the con- 
sumption period. Articles, in general, may be classified 
as absolute necessities ; semi-necessities, or articles necessary 
for comfort; and luxuries. These three groups of articles 
differ distinctly in regularity of use, rapidity of turnover 
and constancy of demand. Food must be regularly eaten, 
and within a relatively short period of time after its prepa- 
ration. The amount spent for it is much less affected by 
adverse conditions than is the amount spent for either of 
the other two groups. The demand for it thus possesses 
an element of regularity which is found to a much lesser 
extent in the case of semi-necessities, and is lacking in the 
case of luxuries. The consumption periods differ accord- 
ingly. This difference is distinctly reflected in the terms 
generally found for each group of articles. 

"Pay-Day" Terms. — The time when the buyer is able 
to pay for goods merely reflects the time when those 



LENGTH OF NET TERMS 23 

who purchase from him in turn are able to pay. The 
ability of the second buyer to pay is then reflected back 
to the original buyer and perhaps in turn to the seller of 
the goods in the original transaction. This was illustrated 
in the quotation above from Mr. Ball's report as to terms 
in various branches of the jewelry industry, where the 
wholesaler found it necessary to consider the time when 
the consumer would be able to pay the dealer. It is readily 
apparent that this is likewise the case with terms in seasonal 
industries. But perhaps the best illustrations are found in 
the case of articles of current consumption sold to retailers. 
In such cases, "pay-day" terms may be employed. Packers 
sell on these terms in railroad, steel mill and mining towns, 
where the retailer carries the worker from one pay day to 
another, and where the due date of his bills is accordingly 
adjusted to the pay days, frequently being semimonthly. 
Recent laws in certain states requiring the payment of 
wages twice a month, are said to have rendered possible 
the material reduction of such terms. 

The distinction sometimes made by packers and whole- 
sale grocers between their terms to the city and to the 
country trade also takes account of the consumer's ability 
to pay the retailer. Several packers grant weekly terms to 
their city trade, as against from two weeks to a month to 
their country trade. A grocer in the Rocky Mountain sec- 
tion states that in the largest cities weekly payments are 
the rule, and in industrial cities bi-weekly payments, while 
country sales carry the regular terms of 1 per cent 10 days, 
net 30 days. These differences are explained by the fact 
that in the largest cities business activities are diversified, 
with frequent receipt of funds by consumers, and conse- 
quent ability to pay the retailer regularly and at short 
intervals. In industrial cities, however, pay days must 
be considered, while in the country consumers have no 
regular and recurring source of income. 



34 THE MECHANISM OP COMMERCIAL CREDIT 

Customary Settlement Dates. — Allied in some ways to 
the pay days just indicated are the customs peculiar to 
certain localities, which have grown up with respect to the 
time when settlements of obligations are to be made. In 
their inception these undoubtedly bore a relation to the 
ability of the purchaser to pay, but in some cases they 
appear at present to represent a survival of tradition, rather 
than to have a more substantial basis in present conditions. 
Various illustrations of the practice may be given. In 
San Francisco the custom is still found to some extent of 
settling twice a month on the so-called ''steamer dajV — 
the 14th and the 28th — on which steamers formerly arrived. 
Again, forty years ago, April 1 was the customary settle- 
ment date in the territory known as ' ' Pennsylvania Dutch. ' ' 
This was adhered to in certain sections, such as in Berks 
and Lancaster counties, until comparatively recently, and 
rendered it difficult for jobbers some years ago to introduce 
the regular hardware terms. In the Middle West, March 1 
still continues to be the regular settlement date for pur- 
chases of farm lands. 

Geography of Terms. — Carrying out further the thought 
of a customary settlement date, it will be observed that 
certain sections of the country have certain seasons of the 
year in which their entire payments are concentrated. The 
classic illustration is afforded by the one-crop agricultural 
sections. From the proceeds of their crop they pay for the 
products which they have obtained on credit during the 
growing season from other sections. Broadly speaking, 
then, their marketing period may be regarded as running 
from the time of planting in the spring until the time of 
marketing in the fall. These sections are twofold: (1) 
the South, with its cotton crop; (2) the Northwest, with 
its grain crop. Prior to the fall of 1920, however, the 
South had been prosperous for several years as a result of 
the high price of its cotton and tobacco, and as a conse- 



LENGTH OF NET TERMS 25 

quence terms granted in wholesale groceries, for example, 
were approaching closer and closer to the standards in 
effect in other parts of the country. The same is true in 
the West. Several middle-western millers note a change 
during the past several years in terms on carload shipments 
of flour to intermountain territory, and there is a tendency 
for the former 30 to 90 days' open-account terms to be 
replaced by arrival-draft terms. 

Further forms of geographical differentiation of terms 
may be cited. These illustrations, which are taken entirely 
from the wholesale grocery line, relate likewise to seasonal 
influences, but consider also the minor crops and more 
restricted sections of the country. In Georgia payments are 
prompter and more purchasers discount their bills in the 
fall and winter, while in the Kentucky tobacco sections, on 
the other hand, an extension of 60 days is often requested 
in the fall, as the crop moves somewhat later. In Okla- 
homa payments are concentrated after the harvest, and few 
discount their bills during the growing season. An Omaha 
firm noted in 1919 that the only overdue accounts it had 
were those of some far-western customers selling to 
ranchers, who carried the latter until either the stock or 
the wool clip was sold. Sectional differences are thus found 
in the payment activity of buyers, both with respect to the 
proportion of accounts past due and the proportion dis- 
counted, as well as in the terms which are specified. 

Terms on Manufacturers ' Raw Materials. — Terms on 
goods which are to serve as raw material for a manufac- 
turer, as contrasted with goods bought for resale, involve 
no special considerations. They are, however, ordinarily 
short. Thus, taking the principal raw material which 
enters into a given product, cotton print cloths are generally 
sold on terms of net 10 days, as are also grege goods to silk 
converters. Likewise, in the men 's hat industry, hat bodies 
in the rough, forming the raw material for the dry shops 



26 THE MECHANISM OF COMMERCIAL CREDIT 

which finish and trim the hats complete and ready for sale, 
carry regular terms of net 30 days. The same is true of 
auxiliary materials such as fuel. Coal and coke are sold, 
both by producers and wholesalers, largely on terms of net 
30 days. 

In all these cases, however, certain of the factors also 
apply which have already been considered as making for 
shorter terms. In every instance the article in last analy- 
sis may be regarded as perishable, for its identity is soon 
lost, while in addition in certain instances it is distinctly 
for recurrent as contrasted with seasonal use. A further 
factor, which will be discussed in detail in the following 
chapter, concerns the difference in relative economic 
strength between buyer and seller. 

Terms on Fixed Capital Goods. — The second class of 
goods are those destined to serve as fixed capital goods to 
the buyer. They require far more detailed analysis than 
do circulating capital goods. In general, the buyer himself 
is expected to own his fixed equipment. He therefore 
should pay either cash or else what approximates cash ; for 
instance, within 30 days, for additions which he makes 
to it, as well as for repairs and replacements. This is like- 
wise true in the case of certain articles for which the 
delivery in effect is delayed, payment merely being adjusted 
according to time of delivery. A leading manufacturer of 
machine tools grants 60 days, 90 days or even 4 months on 
large tools which cannot be made available for use at once, 
in place of the regular terms of net 30 days. Similarly, 
manufacturers of power machinery make exception to the 
regular terms of net 30 days in cases where the machinery 
is to be erected, or when the amount of the order is large, 
and the process of manufacture takes some time. The terms 
differ somewhat with the individual manufacturer, but in 
general an initial payment is required, followed by others 
at specified intervals, and a final payment upon completion 



LENGTH OF NET TERMS 2? 

of the work. Thus the terms, for example, may call for 
60 per cent upon shipment, 20 per cent in 30 days there- 
after, and 20 per cent when the material has been erected. 
In any event, payment is made regularly as the work 
progresses. 

Shipbuilders' terms afford another illustration. They 
provide for an initial payment upon execution of the con- 
tract, usually for 5, 10 or 15 per cent and in rare cases 20 
per cent of the purchase price. Subsequent payments of 
equal amount are required when certain steps in the build- 
ing of the vessel, such as laying the keel, plating, launching, 
etc., have been completed. The number of payments varies 
with the type of vessel and the estimated time required for 
completion, but is stated to be approximately 10 or 12. The 
final installment, varying from 5 to 10 per cent, is generally 
due upon completion and delivery of the vessel. 

An additional point arises in connection with terms on 
the builders' hardware which manufacturers sell direct to 
the contractor or consumer in New York City and vicinity. 
It is the custom to require payment of 85 per cent of each 
month's deliveries by the 10th of the following month, and 
the remaining 15 per cent in 30 days after the completion 
of the building operation. In this case, the terms on fixed 
capital goods are applied to articles which in fact repre- 
sent merely circulating capital to the buyer, albeit cir- 
culating capital which is not of the kind ordinarily con- 
sidered. 

Carrying the Purchaser. — In certain cases manufac- 
turers of fixed capital goods will carry the purchaser for 
some time, instead of actually specifying cash. Such credit 
is of course outside the realm of ordinary trade accommo- 
dation, as is also time in excess of his customary marketing 
period granted a buyer of goods for further manufacture 
or resale. In either case, a loan of capital on a more 
permanent basis is made. The buyer's ability to pay for 



28 THE MECHANISM OF COMMERCIAL CREDIT 

fixed capital goods arises from factors outside the goods 
themselves, and the amount involved is relatively larger 
than in the case of circulating capital goods. Hence pro- 
vision is usually made for installments which periodically 
reduce the total amount due the seller, while he retains title 
to the goods until the buyer makes the.final payment. More 
definite security and greater safeguards are thus introduced 
than in the case of circulating capital goods. 

The general factor determining the extent to which sellers 
in any given industry carry purchasers of capital goods 
will be fully discussed in the following chapter. Practice 
naturally varies according to the industry in question. In 
some lines where the use of these terms is rare, such as in 
connection with manufacturers' sales of railway equipment, 
each individual ease will be considered on its merits, while 
in other industries, where the practice is more frequent, 
fairly definite norms or standards have been established. 
In general, the terms call for payment of part of the amount 
upon delivery, followed by subsequent more or less period- 
ical payments. In the case of articles specially manufac- 
tured, an initial payment may be required with the order. 
Where machines are sold on such terms, the seller usually 
secures himself by retaining a direct interest of one kind 
or another in the article until it is fully paid for. He 
may do this by means of a chattel mortgage, a conditional 
sale or a lease agreement whereby he retains title and 
merely leases the machine to the buyer until final payment 
is made. Practice on this point varies according to the laws 
of the several states. 

An illustration of such terms is afforded by dealers who 
sell machine tools on time. They require an initial cash 
payment, such as 1/2 or 1/3, with order or upon receipt of 
bill of lading, and cover the balance by interest-bearing 
notes maturing monthly for three, four, or in some cases 
six months. They either retain title or else use a chattel 



LENGTH OF NET TERMS 29 

mortgage. A larger item naturally carries longer time. 
Manufacturers who sell printing machinery on time require 
an initial payment of about 1/4, and the balance is due 
within 24 months, being represented by interest-bearing 
notes maturing monthly and secured by a lien on the 
machinery. 

In some cases securities issued by the purchaser are 
accepted in payment for fixed capital goods. Prior to 1917, 
it was reported the general practice in certain cases, such 
as for large bulk cargo ships, to accept one-half the purchase 
price in first serial bonds, maturing in from 1 to 10 years. 
A study made in 1916 indicates that in some cases cotton 
mill stock and bonds were accepted in payment for 
machinery. 

Terms in Retail Trade. — The third class of goods are 
those in the hands of retailers in final form ready for con- 
sumption. Retailer's terms are likewise determined by the 
buyer's ability to pay. When the consumer cannot pay 
cash, he is carried until he periodically receives funds, 
whether from returns for services rendered or from returns 
on capital invested. Bills due for articles purchased for 
current use are rendered regularly, as in the case of the 
" pay-day" terms considered above. For larger items, such 
as household effects, time is often required, and the install- 
ment plan is in vogue. In place of payment out of savings 
from past earnings, payment from current earnings is made. 
Terms on items such as pianos or furniture parallel the 
terms which have just been considered on power machinery, 
etc., and provide the counterpart in what may be called the 
consumptive field to the other terms in the industrial field. 

The Marketing Period in Relation to the Bank. 3 — The 
bank which lends to a business man must consider his 
marketing period, as well as the party who sells him on 

'Compare the writer's Some Aspects of Banking Theory (New 
York, 1920), Chap. iv. 



30 THE MECHANISM OF COMMERCIAL CREDIT 

time. In last analysis, the bank lends in order to supply 
him with current working capital, which he then generally 
uses to purchase goods or materials for further manu- 
facture or for resale. The bank merely puts itself in 
the place of the business man who would otherwise 
have sold the merchandise in question to the borrower 
on time. 

But the bank does not consider merely a specific lot of 
goods. Rather does it consider all the goods handled by 
the borrower — in other words, the totality of his operations, 
both purchases and sales. Its horizon is thus broader than 
that of any single seller. For it, the buyer's marketing 
period is rather a seasonal thing. It asks itself the question : 
when will this particular man be able to clean up the 
accommodation received from us. At that time it expects 
complete liquidation of his loans. For it, therefore, the 
borrower's marketing period on part of his line of credit 
may well exceed the time required to move any specific 
lot of merchandise. This seasonal period sets the upper 
time limit for the bank's loans. Furthermore, because it 
finances a number of firms in any given industry, its in- 
terest and outlook is broader than that of any single 
individual, and the consumption period for the industry 
may often become a more real factor to it. 

The Marketing System 

[ The second factor which determines the length of the 
net terms is the system whereby the article in question is 
marketed. The purchaser may merely buy the goods as he 
needs them, or he may buy for stock. In the first case his 
marketing period is short, and the time which he requires 
is correspondingly short. To the extent that he buys for 
stock, his turnover becomes less rapid and his marketing 
period is lengthened, as is also the time which he requires. 
Taking the case of a sale by a manufacturer to a retailer, 



LENGTH OF NET TERMS 31 

the upper limit to the time which may be extended is fixed 
by the length of time which the merchandise is made in 
advance of purchase by the final consumer. To the extent 
that the article is manufactured in advance of purchase by 
the final consumer, there is a period during which either 
the manufacturer or the retailer may carry it, and to the 
extent that the retailer carries it, the terms which he re- 
ceives are correspondingly lengthened. 

The present problem may appear to be merely an elabora- 
tion of several of the points outlined at the opening of 
the chapter in considering the underlying principle. In 
particular, the difference between seasonal and current 
use was mentioned at that point, in connection with the 
discussion of the nature of the article. But, while there is 
some truth in this view, the problem in fact is of prime 
importance. It is intensified by the system of production 
for a market instead of to order, which is a distinguishing 
characteristic of the present economic order. Moreover, 
it is far wider in scope, and involves also the question of 
the division of the carrying burden between the several 
factors in the economic process, such as the manufacturer, 
the wholesaler and the retailer. 

Industry as a whole bears a certain burden of waiting 
from the time of initial production of an article until the 
time of final consumption, as well as a credit risk in con- 
nection with such waiting. Some participant in the process 
— manufacturer, wholesaler or retailer — must assume the 
burden. The terms which are granted determine who shall 
do this. Thus they push these disadvantages backward or 
forward, or else locate them'in the middle of the economic 
process whereby any given article is produced and 
distributed. 

Some Illustrations. — The custom tailor may purchase his 
woolens in one of two 'ways. He may go to a woolen jobber 
and select certain styles, purchasing one or more suit 



32 THE MECHANISM OF COMMERCIAL CREDIT 

lengths of each pattern, which he then keeps in stock and 
cuts up as he receives orders from customers to whom he 
has displayed them. In this case he keeps the goods in 
stock, and furthermore runs the risk of not selling some of 
them. To avoid this he may instead purchase his woolens 
only as needed. In this event he arranges with one of the 
so-called book houses for a set of their samples, which he 
displays to the customer. When the latter has made a 
selection he orders a suit length of the particular style from 
the book house. In this case, he shifts to the book house 
both the burden of keeping the goods in stock, and the risk 
of not selling some of them. Accordingly, the terms which 
he is granted differ greatly in the two cases. He receives 
long time where he stocks the merchandise, while he pays 
cash where he takes it only as he needs it. The association 
of old line woolen jobbers has recommended terms of 7 per 
cent 10 days, 6 per cent 30 days, 5 per cent 60 days, net 
4 months, with invoices dated ahead about two months, and 
these represent the standard jobbers' terms. On the other 
hand, a large proportion of the customers of book houses 
send cash with order, or accept C. 0. D. shipments. 

While this case may appear merely to afford the buyer 
the option of making his purchases in one of several ways, 
when examined in the reverse manner, it appears that a 
similar alternative is open to the seller. The book houses, 
in fact, avail themselves of it, as they usually conduct a 
regular jobbing business also. In between the two alterna- 
tives, and somewhat akin to each, is consignment business. 
This was widely employed some years ago by manufacturers 
of auto tires, as well as prior to 1912 in the case of over 
50 per cent of the fur manufacturing industry, but it has 
steadily lost ground wherever it has been used. While it 
is true that in such cases the goods have not actually been 
purchased by those to whom they are shipped, nevertheless 
the time granted is automatically adjusted to the marketing 



LENGTH OF NET TERMS 33 

period. The retailer is granted credit for a period exactly 
equal to the time during which he carries the merchandise. 

Two further illustrations of the interrelation between 
terms and marketing methods are instructive. Accompany- 
ing the decrease in the length of manufacturers' terms on 
agricultural implements has been the fact that dealers do 
not place as large initial stock orders as formerly, while 
direct shipments from factories to dealers have also de- 
creased, so that the manufacturers themselves are required 
to carry larger stocks at distributing points. On the other 
hand, consider refiners' terms on sugar in the summer of 
1920. The normal terms are 2 per cent for payment within 
7 days after arrival, or 10 days from date of delivery in 
the case of local deliveries by truck. In order to help carry 
stocks and prevent sacrifice sales, with consequent demoral- 
ization of the market, refiners extended credit at that time. 
By doing this they recognized that a newer and slower 
buyers' marketing period existed at that price level, .and 
adjusted their own terms accordingly. Buyers in effect 
were purchasing, partly at least, for stock, rather than for 
current use only, and the marketing system had changed 
accordingly. 

The forces, which determine exactly in what proportion 
the time elapsing between the manufacture of the article 
and its final sale to the consumer is divided between the 
manufacturer and the retailer, will be considered in detail 
in Chapter IV when discussing the theory of datings. This 
division of time, however, by no means alters the fact that 
the manufacturer in last analysis actually assumes the 
burden of financing in either case. He provides the funds 
which the merchandise represents, whether he himself holds 
the article or whether the retailer holds it. It should also 
be noted that the problem concerns largely articles which 
will be consumption goods in their final form rather than 
production goods. 



34 THE MECHANISM OF COMMERCIAL CREDIT 

The Wholesaler's Credit Function. — The wholesaler 
plays a prominent role in the marketing system. The 
orthodox view considers an article passing from manufac- 
turer to wholesaler and in turn from wholesaler to retailer. 
In this system the wholesaler performs certain services 
which are well known. For the present purpose the out- 
standing feature is the assembling of a variety of goods 
produced by a large number of different manufacturers. 
The wholesaler then keeps the merchandise in stock and 
subsequently passes it on to a large number of different 
retailers as the latter desire it. Gathering these goods 
together from a multiplicity of sources he then distributes 
these same goods when and where they are needed. In 
technical economic language, he takes the form utilities 
which the manufacturer has created, and adds to them 
time and place utilities. Most conspicuous among the lines 
in which he operates are groceries, hardware, dry goods and 
drugs. 

In selling to the larger number of different retailers, 
wholesalers also perform what may be termed their credit 
function. They lighten the manufacturer's credit work by 
making it necessary for him to keep check only on a smaller 
number of wholesalers instead of on a multiplicity of re- 
tailers. The wholesalers themselves keep check on the 
retailers. But they do even more. They not merely inter- 
vene in the capacity of credit men, but they also take over 
from the manufacturer to some extent the burden of supply- 
ing the funds which the goods they are engaged in passing 
from manufacturer to retailer represent. In other words, 
the burden is divided between manufacturer and whole- 
saler, instead of being confined to the manufacturer, as was 
the case in the illustration given above. 

The extent to which the burden is divided will differ 
according to whether or not the particular industry is 
strongly of a seasonal character. In non-seasonal industries, 



LENGTH OP NET TERMS 39 

the wholesaler generally buys for cash (by discounting his 
bills), stocks the merchandise, ships only as ordered by the 
retailer, and sells on time. In highly seasonal industries, 
on the other hand, the entire time elapsing between the 
manufacture of the article and its final sale by the retailer 
is more definitely divided between manufacturer and whole- 
saler. The manufacturer's terms to the wholesaler 
generally call for payment at a definite season date (assum- 
ing that the latter discounts his bills), and the wholesaler 
then carries the retailer until a further net due date. 

Manufacturers' and Wholesalers' Terms. — There are 
numerous variations in actual practice from the orthodox 
marketing system. Several of them are of particular im- 
portance in relation to terms. In some leading industries 
the regular marketing chain runs from manufacturer to 
retailer. This is the case, for example, with meat packing 
and men 's and women 's clothing, as well as with industries 
concerned with capital items such as machinery or agri- 
cultural implements. In all these industries the range of 
products handled is greatly narrowed and the manufac- 
turer himself, in part at least, must perform the jobber's 
function of maintaining an adequate stock of goods as well 
as the credit function. In other industries marketing 
methods vary with the different manufacturers. Some sell 
direct to the retailer, while others sell to the wholesaler, 
or else the same manufacturer sells to both. Examples are 
afforded by industries as dissimilar as boots and shoes and 
confectionery. In such industries the problem arises of 
the relation which manufacturers' terms to wholesalers 
generally bear to manufacturers' terms to retailers. This 
depends very largely upon the extent to which retailers as 
well as wholesalers in any given industry buy in advance 
of their immediate needs. Where the retailer does this, 
and therefore stocks the article to some extent, there is 
generally a tendency in non-seasonal lines for manufac- 



36 THE MECHANISM OF COMMERCIAL CREDIT 

turers' terms to retailers to be either longer than their 
terms to wholesalers, or, where they are the same, for the 
retailers to take full time instead of discounting their bills, 
and thus to be carried for a corresponding period by the 
manufacturer. Where the retailer, however, merely buys 
for immediate resale, while the wholesaler stocks the article, 
the situation as to terms is reversed. The lighter refined 
petroleum products, such as gasoline and kerosene, at pres- 
ent generally bear terms of net 30 days in the case of carload 
shipments, which are made to oil jobbers who have bulk 
storage and who barrel or can the product, and then ship 
them to factories, garages, and storekeepers. On the other 
hand, net cash is largely required for tank wagon deliveries 
and filling station sales. 

In highly seasonal industries where the wholesaler must 
stock the merchandise, while it is shipped to the retailer 
only as he requires it, manufacturers ' formal terms to 
retailers may well be shorter also. The wholesaler may 
receive a season dating, whereas the retailer may receive 
merely net 30 days, although his payment, according to 
these terms, will not be due until after the wholesaler's is 
due. In the glove industry prior to 1915, for example, 
manufacturers' terms to retailers were largely 6 per cent 
10 days, 60 days extra (that is, due in 70 days), whereas 
their terms to wholesalers were largely 6 per cent 10 days 
or 5 per cent 30 days, with season datings of May 1 and 
November 1 on season shipments, but with only 30 days 
extra between seasons. 

In industries where some sales are made directly to re- 
tailers by manufacturers, as well as to wholesalers, the 
further question arises of the relation which manufacturers' 
terms to retailers bear to wholesalers' terms to retailers. 
In some cases there may be no difference, but in other 
cases, especially in industries in which the wholesaler plays 
only a minor role, wholesalers tend to sell the poorer class 



LENGTH OF NET TERMS 37 

of retailers, and to maintain their position in part at least 
through the fact that they grant longer terms to retailers 
than manufacturers grant. Thus the small number of 
jobbers of meat products in the larger centers often grant 
terms of 2 per cent 10 days, net 60 days as compared with 
maximum terms extended by packers of 1 per cent 10 days, 
net 30 days. Similarly, leather jobbers, on the whole, sell 
to smaller accounts which the tanners would not solicit, and 
their collections are generally believed to be less prompt, 
although in some cases at least their quoted terms do not 
differ from tanners' terms. 

In this discussion the orthodox wholesaler has alone been 
considered, while no attention has been given to the specu- 
lative or trading jobber, who is found for example in the 
non-ferrous metal industries or (to a greatly increased ex- 
tent during the war period) in the various branches of the 
textile industry. A jobber of the latter description does 
not form a regular connecting link between manufacturer 
and retailer, but competes with, as well as buys from, the 
manufacturer. Where goods are scarce his aim is to have 
some available in a sort of open market in the trade, and his 
business is perhaps most accurately described as a form of 
price-difference trading. His terms will be considered in 
the course of the next chapter. 



CHAPTER III 

LENGTH OF NET TERMS (CONTINUED) 

In the preceding chapter two of the factors which influ- 
ence the length of net terms were considered: (1), the 
underlying factor, and (2), the marketing system whereby 
the article is brought from producer to final consumer. In 
the present chapter the third factor will be considered, 
namely the general competitive conditions which exist in 
the industry in question, and the variety of ways in which 
the influence of this factor manifests itself. After this is 
done several special aspects of the general question of the 
length of net terms will be discussed. 

General Competitive Conditions 

Those changes in terms which occur over a period of time 
in response to changes in general business conditions are 
not due to general competitive conditions, in the sense in 
which the expression is here employed. Nor is reference 
made to changes in the market for a particular article, such 
as occur, for example, when war time scarcity disappears 
in the face of new sources of supply opened by the return 
to peace. Instead, consideration is given rather to the situa- 
tion which prevails in the industry at a given moment of 
time, and which exists with respect to the relative economic 
strength of buyers and sellers in that line. In every indus- 
try there is a usual or customary relation which, broadly 
speaking, remains unchanged over a period of time. This 
relation between the economic strength of the two parties 
exerts great influence upon the terms which are employed, 

38 



LENGTH OF NET TERMS 39 1 

and in particular determines whether or not the length of 
the terms shall equal the buyer's full marketing period. 
In some cases, however, it may determine, not what the 
terms shall be, but rather to what extent the regular or 
standard terms specified are actually observed. The general 
competitive conditions which govern the relation are varied, 
and so also is their influence upon the terms. 

Relative Size of Buyer and Seller. — It is necessary first 
to consider the relative size on the whole of the buyer and 
the seller in the particular industry in question. A small 
weak seller tends to receive cash from a large strong 
buyer. Thus the farmer receives cash for his cattle from 
the packer who purchases them. On the other hand, how- 
ever, large buyers who are in a strong position may attempt 
to force concessions from smaller and weaker sellers, al- 
though this may take the form, as will be seen in a later 
chapter, of paying cash and endeavoring to obtain a cor- 
respondingly larger discount in consequence. Turning 
from large buyers to large sellers, firms which are in a 
strong position and sell to smaller buyers may do one of 
two things : either shorten the time (perhaps indirectly by 
increasing the cash discount) or deliberately follow a policy 
of carrying the buyer for his entire marketing period. Both 
policies have been pursued, the use of the former depending 
upon the position which the seller holds in the market. 

Competition or Concentration among Buyers and Sellers. 
— Closely related in some cases to the question of the rela- 
tive size of buyers and sellers is the question of the relative 
degree of competition or concentration among each. Cer- 
tain of the illustrations which will be given, accordingly, 
show the influence of size as well as of competition or 
concentration. As a general rule, the greater the degree 
of competition among the sellers, the more the concessions 
which they must make, and vice versa, the greater the de- 
gree of concentration, the more they are able to dictate the 



40 THE MECHANISM OF COMMERCIAL CREDIT 

terms. A similar situation exists in the case of competition 
or concentration respectively among the buyers. The in- 
fluence of the sellers' situation may be illustrated by 
contrasting sugar refiners' terms with those of coffee 
roasters and spice grinders. Sugar refining is a highly 
concentrated industry, and it has been stated that a refinery 
of the best type requires a capital of perhaps $2,000,000 or 
$3,000,000. 1 Coffee, tea and spices, on the other hand, are 
highly competitive lines. Terms of sugar refiners are short 
■ — largely 2 per cent 7 days after arrival of shipment or 
10 days from date of delivery in the case of local deliveries 
by truck — while terms on roasted coffee are largely 2 per 
cent 10 days, net 60 days, and terms on ground spices are 
largely 1 per cent 10 days, net 30 days. 

The influence of concentration among the sellers is also 
seen when contrasting the situation in the iron and steel 
industry before and after about 1900. Prior to that time, 
terms were very irregular, often being made to suit the 
special needs of particular purchasers. In general they 
were also long. One authority states that they often ran 
from 4 to 8 months, but with substantial cash discounts, 
while another states that quarterly settlements were fre- 
quent, although oftentimes an extension bearing interest 
was granted. Since about 1900 each of the principal classes 
of product has carried certain regular terms, the general 
net period being 30 days, with a cash discount on certain 
items of 1/2 per cent or 1 per cent 10 days. Bolts and 
nuts afford a more recent illustration from this same gen- 
eral field., This industry is relatively concentrated, and 
there are not over 25 producers. About 1912 they made an 
unsuccessful effort to reduce the terms from 2 per cent 10 
days, net 60 days, but several years later succeeded. This 
was in spite of the strong resistance of the hardware job- 

x Jenks and Clark, The Trust Problem, Rev. Ed. (Garden City and 
New York, 1920), p. 139. 



LENGTH OF NET TERMS 41 

bers, who, however, handle only a small part of the total 
output, as the major part is sold direct by manufacturers 
to industrial consumers. Present terms are therefore 1 
per cent 10 days, net 30 days. 

In industries where strong competition exists between the 
sellers, terms lack uniformity and in addition may tend to 
be long and to be poorly observed. In the bituminous coal 
industry west of Pittsburgh, a buyers' market almost uni- 
formly prevails, while to the east supply and demand are 
more nearly equal, and there is a corresponding difference 
in the degree to which business terms may be insisted upon. 
In the lumber manufacturing industry, it is estimated that 
there are upward of 40,000 operators. These operators are 
of several classes, and each class has its distinctive type of 
terms. Very small operators without yards, who put their 
product in transit as soon as cut, generally employ terms 
calling for part cash, such as 10 per cent or more, with or- 
der and balance on receipt of notice of shipment. A second 
class of terms relates to special contracts drawn to cover a 
considerable period of time, and these vary according to the 
individual case. A third class are those recommended by the 
American Lumber Congress and by certain manufacturers' 
associations, and are in general 2 per cent 10 days or 15 
days from date of invoice or 5 days after arrival of car, net 
60 days from date of invoice. Deviation from these recom- 
mended terms is frequent. 

Finally, the larger markets are often influential in forcing 
more liberal terms. Particularly is this the case in the lead- 
ing wholesale lines. The effort in 1918 to shorten net whole- 
sale hardware terms in the south to 30 days was hindered 
by the fact that the large middle western centers, such as 
Chicago, St. Louis and Louisville, continued on the 60-day 
basis, although the same cash discount of 2 per cent 10 
days was given in both cases. Again, greater standardiza- 
tion of Wholesale grocers' terms prevails in the middle 



42 THE MECHANISM OF COMMERCIAL CREDIT 

west and west. This is due partly to the fact that where- 
as in some other markets, such as New York and Chicago, 
there are manufacturing jobbers who do to a great extent 
a national and semi-national business, and traders who 
sell staple goods for cash at cut prices, in addition to houses 
which do the usual wholesale grocery business, in the sec- 
tions mentioned houses are more or less generally of the last 
type. In these sections, moreover, less competition is ex- 
perienced from exclusive tea and coffee and other specialty 
jobbers than in the more thickly populated territories. 
Turning to a totally different industry, a leading hosiery 
manufacturer states that he lengthens net terms by 30 days 
in highly competitive markets, such as New York, Chicago 
and Cleveland. 

Cash Outlay, Profits Margin and Capital Position of the 
Seller. — The conditions under which the article is produced 
also influence the length of the net terms which manufac- 
turers grant. An important factor is the amount of cash 
outlay involved for labor and materials in manufacturing 
the goods. This has been stated as follows by Mr. Ball in 
the report to which reference was made in the preceding 
chapter : 

"Where the cash outlay constitutes a large part of the selling 
price, terms will be short — where it represents a small part of the 
selling price, terms will lengthen. That is why in recent years, 
with labor and material costs rapidly rising, we have constantly 
been advised of the necessity for shorter terms. The more nearly 
goods represent cash the quicker they must be exchanged for 
cash. 

Such conditions are found in industries which are other- 
wise widely different. Mr. Ball was discussing jewelry 
terms, but the same point has been made by a leading pro- 
ducer of lead and zinc. A builder of railway cars has 
described the similar conditions which exist in his industry 
as follows : 



LENGTH OF NET TERMS 43 

The building of freight and passenger cars is largely a ques- 
tion of assembling semi-finished and finished materials and, after 
performing certain work on the same, erecting the finished cars. 
The cost of the materials to us represents usually about 70 to 
80 per cent of the selling price of the ear, and as a general rule 
the margin of profit is small. The car builder has to pay cash 
for all of this material and for the labor, so unless he can receive 
prompt payment for the finished cars his margin of profit will 
soon disappear in interest charges. 

It will be noted that in this quotation a second factor is 
also listed, namely the seller's margin of profit. This is 
of importance also in connection with the cash discount 
specified. The applicability of this point to the hardware 
wholesaler has been indicated as follows: 

The jobber's line extends through many gradations of items, 
from the basic necessities to the line of luxuries, and the further 
away they grade from these lines of necessity and nearness to 
raw material, the greater the profit and the less need for quick 
turnover. 2 

Related in some ways to these two factors, as well as to 
the size of the seller, is the question of his capital position. 
The influence of this factor is seen when contrasting the 
situation of manufacturers of machine tools with that of 
manufacturers of mill supplies. In the words of a leading 
dealer, 

the former are generally made by manufacturers who are well 
organized and who have sufficient capital. In a great many lines 
of machine tools, furthermore, their customers are largely dealers 
who are well established and whose rating is first class. The 
manufacturer therefore is not obliged to worry about his money 
and prefers to wait 30 days rather than offer a premium for 
pre-payment. Mill supplies are made in a great many cases by 
smaller manufacturers, who possibly are not so well financed as 
the machine tool manufacturers and the custom of offering a 

a W. M. Bonham, "Terms of Sale in the Hardware Business," Bul- 
letin, of the National Association of Credit Men, September, 1919, 
p. 835. 



44 THE MECHANISM OF COMMERCIAL CREDIT 

premium for pre-payment of invoices (and thus shortening terms) 
is far more common among them than among the machine tool 
manufacturers. 

An interesting corollary of this general question is seen 
in connection with the decision of a clothing manufacturer, 
several years ago, to largely increase his output on the same 
capital, and the consequent necessity of turning his capital 
much of tener which he was under. This he did by abolish- 
ing the season dating which, lie had formerly granted, thus 
shortening his terms correspondingly. 

Trade-Marked Goods. — The manufacturer of widely ad- 
vertised and popular brands of goods often occupies a 
peculiarly strategic position with respect to those to whom 
he sells. He has created a large demand for his goods, and 
the buyer must purchase them in order to meet the con- 
sumers' demand. Thus the manufacturer is enabled to 
dictate the terms. In certain lines where the bulk of the 
products are widely advertised articles, the general terms 
will reflect this situation, while in industries where widely 
advertised articles do not predominate, the manufacturer 
of particular brands is enabled to make his own terms 
irrespective of those employed in the industry as a whole. 
Manufacturers who are thus strategically situated tend to 
shorten their terms, although the extent to which this may 
be done depends of course upon the strength, or, in tech- 
nical economic language, the inelasticity, of the demand for 
their products. It should be borne in mind, however, that 
such goods also move quickly through the buyer's hands, 
and his marketing period is thus shortened. 

A good illustration of such terms is afforded by the 
tobacco industry. ''Probably 99 per cent of all tobacco 
products other than cigars, if not fully 100 per cent/' states 
a leading authority, "are sold under well-established and 
popular trade marks, while in cigars the case is quite differ- 
ent." There are a number of well-established brands of 



LENGTH OF NET TERMS 45 

cigars which are sold upon the same standard terms as are 
the other tobacco products, namely 2 per cent 10 days to 
30 days. The remainder of the cigar business is conducted 
in considerable part by small manufacturers. Sharp com- 
petition prevails and terms, which have quite a bearing in 
making sales, are longer and far less standardized. Manu- 
facturers' terms to jobbers vary from net 10 days to net 
30 days, with a cash discount of from 1 to 2 per cent in 
certain cases, while jobbers' terms to retailers are generally 
longer. Standardization of terms on the manufactured 
products tends to be aided by the relative degree of con- 
centration existing in the industry. 

Regularity of Relationship between Buyer and Seller. 
— Another important aspect in connection with the general 
competitive conditions existing in any given industry is 
the degree of regularity found in the relationship between 
buyers and sellers. Where there is a regular and continu- 
ing relationship, such as between wholesaler and retailer, 
a basis is afforded for the extension of time, with the buyer 's 
marketing period as an upper limit. On the other hand, 
when each purchase or sale is separate and isolated, no 
oversight of buyers' operations by the seller exists. This is 
especially the case in what may be termed open-market 
trading. Moreover, in this case either buyer or seller — 
perhaps both — in any transaction will be a speculative or 
trading jobber of the kind described at the close of the 
previous chapter. Such a jobber forms no regular connect- 
ing link between manufacturer and retailer, and he has no 
regular marketing period. Furthermore, he himself is not 
interested in the business of those who purchase from him, 
and does not perform the regular wholesaler's credit func- 
tion. His terms therefore tend to be short, although they 
often are adapted largely to the needs of the individual 
case. In consequence, too, they often vary considerably. 

Jobbers of this kind dealing in men's wear woolens and 



46 THE MECHANISM OF COMMERCIAL CREDIT 

worsteds frequently sell on terms of net 30 days, although, 
spot cash or net 10 days, net 60 days, and net 4 months 
are also given. Regular jobbers' terms are 7 per cent 10 
days, 6 per cent 30 days, 5 per cent 60 days, net 4 months, 
with extra dating of about 60 days. Again, in copper and 
zinc a considerable speculative jobbing interest exists, and 
is sufficient to affect seriously the general terms employed 
by the producers. Strictly speaking, for these metals there 
are no " regular" terms. Sales in both cases, woolens and 
metals, are largely spot, as distinguished from contract 
sales. Spot sales of anthracite are often made for cash, and 
a slightly lesser price, such as 5 cents per ton, is quoted, 
although these sales usually bear the same terms as contract 
sales, namely the 15th proximo. While this is the situation 
in the wholesale market, it has been said that credit is often 
extended by wholesalers to retailers, and that practical and 
exclusive connections are made when the retailer is carried 
in this way. 3 

The open markets in each of these industries are unor- 
ganized. The general principle, however, applies also to 
those markets which are organized, and which are found 
especially in connection with agricultural products. While 
such markets differ in degree of organization, they usually 
have rules governing the trading, which generally cover a 
variety of other matters as well as incidentally the question 
of terms. In such markets the absence of a regular rela- 
tion between buyer and seller and perhaps also of a regular 
marketing period for the buyer is even more complete than 
in the case of the unorganized markets. Terms are there- 
fore cash. The packer or the feeder who purchases cattle 
at the stockyards pays cash to the commission firm to whom 
the stockman has forwarded his cattle. Thus, too, the 
southern tobacco grower receives cash from the leaf sales 

3 Eeport of the Federal Trade Commission on Anthracite and 
Bituminous Coal, June 20, 1917. 



LENGTH OF NET TERMS 47 

warehouseman who has auctioned off his tobacco, and re- 
ceives it on the day the tobacco is sold, the warehouseman 
in most cases collecting the following day from the buyer. 
Finally, a similar situation exists in the case of the grain 
exchanges, and the rules of the Chicago Board of Trade, 
for example, call for cash on day of delivery. 

Business Character of Each. — Lastly, the business char- 
acter of both buyer and seller must be considered. By this 
is meant the extent to which business customs are observed, 
irrespective of whether the deviation is due to the absence 
of a business habit of thought, as on the part of the house- 
wife, or to an overdeveloped desire for trading in the 
popular sense of the term, as is often the case with small 
weak firms. This factor has an effect in a variety of direc- 
tions. It affects the degree of standardization of terms in 
the industry, as well as the actual length of the terms 
specified and extent to which they are observed. It is 
closely related to the degree of competition existing, which 
was discussed above, and its influence is seen in some of 
the illustrations given in that connection. The consumer 
affords the most conspicuous case where business character 
is absent in ordinary operations, while in the business field, 
there may be cited the trading jobber who arose in the 
textile industry during the war and the small manufac- 
turer in the garment trades. In industries where this is the 
case, the standard of business morality is generally low. 

General Illustrations. — In the first part of the preceding 
chapter it was assumed that the terms generally equal the 
buyer's marketing period, and that the seller thus carries 
the buyer for that length of time. In the second part it 
was seen that where merchandise passes through two hands 
before reaching the buyer, either may carry it, or both may 
cooperate in the carrying process. The extent to which 
each participates is determined by the general competitive 



48 THE MECHANISM OF COMMERCIAL CREDIT 

conditions existing, which have been discussed in the pres- 
ent chapter. These conditions in certain cases may make 
the length of the terms employed in a given industry 
materially shorter than the buyer's marketing period. In 
other words, in addition to the class of terms where the 
seller carries the buyer and thus the article in question, 
there is another class in which the buyer instead carries the 
article, due to the general competitive conditions which 
exist, and a third in which the task of carrying is divided 
between buyer and seller. The buyer's marketing period, 
therefore, frequently affords an upper limit to the length 
of the terms, instead of serving as an absolute regulator 
of them. Two outstanding examples of cases where the 
seller does not do the entire carrying are afforded by terms 
on agricultural produce, and terms on sales by manufac- 
turers to wholesalers. In both, several of the forces con- 
sidered under the head of general competitive conditions 
are at work, and together operate to influence the terms 
employed. 

As already indicated, the farmer generally receives cash 
for his produce. This is due chiefly to his lack of economic 
strength as compared with the buyer of his products, both 
as to size and capital position, and to the fact that he may 
be said to have already "carried" the product while mak- 
ing the crop. Moreover, no regular relationship exists 
between him and the buyer, so that this feature, which is 
of great importance where credit is granted, is absent. 
Finally, farming, as it is at present conducted, may on the 
whole be said to have little business character. In conse- 
quence, therefore, the buyer's marketing period does not 
operate as a regulator of terms in the agricultural field, 
but is confined solely to the industrial and commercial 
fields. 

The regular wholesaler's credit function was indicated 
in the preceding chapter. As was pointed out there, the 



LENGTH OF NET TERMS 49 

position which he occupies in the marketing process prac- 
tically carries this credit function with it, and the terms 
which he receives from the manufacturer are further influ- 
enced by the disproportion in size and capital position 
which frequently exists between him and the manufac- 
turer. The same factor operates in a somewhat different 
manner in the case of dealers or producers of articles, 
whether absolutely raw or merely semi-finished, which serve 
as raw material for manufacturers. As has already been 
seen, such products are generally sold for cash, since in 
last analysis they may be regarded as perishable, and in 
certain cases, at least, are destined for current as con- 
trasted with seasonal use. In addition, the purchasing 
manufacturer usually is in a strong financial position — 
stronger, perhaps, than that of the seller. The seller of 
these products, whether dealer or manufacturer, therefore 
generally has no regular credit function, and the dealer 
partakes largely of the nature of a trader, operating in the 
open market in the industry in question. 

Both packer and country hides are generally sold both 
by packers and dealers on terms of sight draft against bill 
of lading, although in a few cases longer terms are granted, 
but the price is correspondingly increased. These terms, 
however, may be due to some extent to the position occupied 
by the large packers. Similarly, tanners' terms to shoe 
manufacturers are short, as the latter usually are in a 
strong financial position. Regular terms on sole leather 
are 4 per cent 10 days, 3 per cent 30 days, 2 per cent 60 
days, net 90 days, and on upper leather are 5 per cent 10 
days, 4 per cent 30 days. In both cases, monthly settlement 
is frequent. 

On the other hand, the seller may extend credit in eases 
where it is needed by the purchasing manufacturer. A 
good illustration is afforded by the leaf tobacco industry. 
Dealers' terms are largely adapted to the needs of the indi- 



50 THE MECHANISM OF COMMERCIAL CREDIT 

vidua! purchaser. Strong manufacturers may pay weekly 
as a statement is rendered of purchases made for them by 
the dealer, while the terms to them will be short in the 
event of sales from the dealer's stock. But smaller and 
weaker manufacturers, assuming that they are in good 
standing, will receive additional time. Four and 6 months 
are often granted, in many cases with note or trade accept- 
ance, or a statement may even be rendered at the close of 
the season for the season's purchases, and the dealer may 
charge interest for the time taken. 

Mutual Interrelation of Terms. — The terms on any one 
product are not determined entirely independent of the 
terms on other products. On the contrary, these are also 
taken into account, and when two products are related, the 
terms on one may even exercise a determining influence 
upon the terms which the other shall bear. The influence 
manifests itself in a variety of ways. 

1. A manufacturer or dealer who handles two separate 
products frequently applies the same terms to both. Paints 
and varnishes are often produced by the same manufac- 
turer, and they are distributed largely through the same 
jobbers, while a close relation exists between their use. 
Especially has this been the case since about 5 years ago, 
when paint manufacturers added varnish plants, while 
conversely many varnish manufacturers commenced to 
manufacture paint. Varnish terms, therefore, tend to con- 
form to those on paint, and the regular terms on both are 
now 2 per cent 10 days, net 60 days, the varnish terms 
having been changed about 5 years ago from 5 per cent 30 
days, net 4 months. A similar explanation applies to 
terms in the optical industry, where wholesalers generally 
continue to quote terms of 6 per cent 10 days e. o. m. (due 
10th of following month). This is said to be "a relic of 
the days when the optical business was closely affiliated 
with the jewelry trade," although the two lines are now 



LENGTH OF NET TERMS 51 

quite distinct and affiliated only in rare cases. Other 
illustrations are afforded by the application of manufac- 
turers' terms on carpets and rugs to linoleum also, as 
well as by the use of the regular sole leather terms of 5 
per cent 10 days, 4 per cent 30 days on purchases by 
fancy goods manufacturers from tanners producing chiefly" 
sole leather, in place of the customary fancy leather terms 
of 2 per cent 10 days, net 30 days or 2 per cent 30 
days. 

2. Where several articles are purchased by the buyer, 
the major product fixes the terms, and the minor products 
are governed accordingly. This is the case, for example, 
with woolens and tailors' trimmings. In this instance, 
furthermore, as in jseveral of the preceding illustrations, 
the buyer 's marketing period for the two articles is similar, 
and both are handled in the same manner. 

3. During recent years wholesalers in leading lines have 
undertaken in an increasing degree to handle also other 
more or less related products, and this has created certain 
problems as to terms. Hardware wholesalers now sell auto- 
mobile accessories on the regular hardware terms of 2 per 
cent 10 days, net 60 days, in place of the terms granted by 
regular accessory dealers of 2 per cent 10 days, net 30 
days. This is done by hardware wholesalers in the interest 
of uniform terms on all the products they handle. It is 
not possible in all cases, however, to achieve this object, 
especially where the terms would be shortened or discounts 
decreased, or where the bulk of the product is handled 
through other channels. Moreover, in adding related lines, 
the wholesaler comes to handle certain goods which are 
distributed only to a small extent through his own trade. 
He therefore must reach out to sell these items to retailers 
other than those to whom he has previously catered regu- 
larly. The wholesale druggist has faced these problems 
and has devoted much attention to them. For example, 



52 THE MECHANISM OF COMMERCIAL CREDIT 

jobbers of stationery and school supplies frequently carry 
goods which may be classed as druggists' sundries, so that 
the wholesale druggist has undertaken to induce the 
stationery wholesaler to employ the regular drug terms of 
1 per cent 10 days, net 30 days. These efforts have met 
with some success, and in 1916 it was stated that many lead- 
ing stationery houses had reduced their cash discount from 
5 or 6 per cent to 2 per cent, net terms at that time being 
60 days. The success, however, is by no means complete, 
and the regular stationery terms at present are still differ- 
ent from the drug terms. 

4. Finally the interrelation of terms may be based upon 
geographic considerations. The Montana and North 
Dakota "Wholesale Grocers' Associations have always been 
governed in preparing their recommended terms by the 
terms of the Minnesota Wholesale Grocers' Association, due 
to the fact that the large Minneapolis houses sell throughout 
their territory, and to the fact that there are no large 
independent markets in these two states. On the other 
hand, however, the Minnesota Wholesale Grocers' Associa- 
tion has always been largely influenced by the terms 
employed in the territory to the east of it. 

Terms of the Individual House. — In the above discussion 
attention has been directed chiefly to the regular terms 
which exist in the various industries. The terms of the 
individual house in any particular case may differ from 
these terms to a greater or lesser extent. Whether the 
seller as a general rule deviates from these terms, depends 
upon the particular situation in which he finds himself. 
T?he factors to be considered are similar to those discussed 
under the head of general competitive conditions. It has 
already been noted that a manufacturer of well-known 
trade-marked goods may in large measure dictate his own 
terms, while, on the other hand, a small weak seller whose 
capital is insufficient to enable him to extend the regular 



LENGTH OF NET TERMS 53 

terms, may offer a special concession in the way of a dis- 
count in order to insure prompt payment. 

Differentiation may also be made by the seller in the case 
of individual buyers. Additional time may be granted a 
small buyer worthy of credit, although the regular terms 
call for shorter time. On the other hand, the poor credit 
risk may be required to pay before he receives the mer- 
chandise. This may be done either by requiring cash with 
order, or when he receives the merchandise, through the 
use of C.O.D. or sight draft terms. In lines where what 
may be designated as "graded terms" are employed, such 
as 8 per cent 10 days, 7 per cent 30 days, 6 per cent 60 days 
(the recommended terms of the New York City Garment 
Conference Council of Wholesalers and Retailers), a poorer 
credit risk may be quoted only the first two terms and thus 
receive not longer than 30 days, while a better risk may 
have the amount of his purchases on the regular terms 
limited. A woolen manufacturer, for example, may thus 
fix a line of credit, indicating the amount which the buyer 
may purchase on the regular terms of 7 per cent 4 months, 
and require him to pay cash, through 10 per cent 10 day 
terms, for any additional purchases he may wish to make. 

How the Net Period is Covered. — The usual method of 
selling goods is on open account. That is to say, the seller 
keeps the record, and sends the buyer a statement of 
amounts due. In technical economic language, the credit 
is unembodied. But certain exceptions are found where 
credit becomes embodied. These Imay conveniently be 
grouped into three classes. 

1. In certain staple lines a sight or arrival draft is regu- 
larly employed. Carload shipments of flour are usually 
made (except in Texas and intermountain territory) 
against arrival draft, with order bill of lading attached, 
while canners generally sell at present on terms of 2 per 
cent for payment of sight draft, 1 1/2 per cent for payment 



54 THE MECHANISM OF COMMERCIAL CREDIT 

on arrival or within 3 days thereafter or within 10 daya 
from date of invoice, and net terms of 60 days. Similarly 
producers of copper, lead and zinc often use a sight or 
arrival draft or 10, 20, or 30-day draft, while manufacturers 
of automobiles generally use a sight draft with bill of 
lading attached in the case of cars which they ship to 
dealers. 

Digressing for a moment, it may be observed here that 
cash in effect is required where a sight or arrival draft is 
employed, the terms in the latter case covering the period 
required for transportation of the merchandise from seller 
to buyer. In some industries, such as copper, lead and zinc, 
an effort has been definitely made by certain sellers to 
adjust the terms to the time required for delivery. Thus 10 
days from date of shipment has been given if made from 
an eastern refinery and 30 days if made from a western 
refinery. Terms of this kind at the same time avoid dis- 
putes as to what constitutes time of arrival, which are 
frequent where terms calling for payment upon arrival 
are employed. The purchaser, however, often favors ar- 
rival terms, while tie seller opposes them. An example of 
this is seen in the lumber industry, where wholesalers have 
strongly opposed the efforts of the retailers' associations, 
especially those in the metropolitan district, to establish 
terms based upon date of arrival. 

2. Exception is made in the case of lines where terms 
are rather long and buyers in general are small and of 
poorer standing. In such cases a promissory note is used. 
This is often done in the jewelry industry in cases where 
season settlements or net terms of 4 months are permitted ; 
in the tobacco industry on sales of leaf by dealers to smaller 
manufacturers on extended time; and in the case of the 
wholesale lumber industry. The recommended terms of 
the National Wholesale Lumber Dealers' Association pro- 
vide for the use of either trade acceptance or note where 



LENGTH OF NET TERMS 55 

the net terms of 60 days from date of invoice are used. 
Acceptances are also frequent in the tobacco industry in 
place of notes, and in both these industries have been used 
for some years past. 

3. Acceptances have been largely employed in recent 
years in several industries in connection with season 
datings. While rubber manufacturers regularly sell auto- 
mobile tires on open account for monthly payment, on 
winter shipments bearing a specified spring due date, such 
as part April 10, part May 10, and the remainder June 10, 
the trade acceptance is generally employed. Again, the 
recommended terms of the Wall Paper Manufacturers' 
Association provide for the use of a trade acceptance due 
90 days from date of invoice, in the event that cash is not 
paid by the 10th proximo. Finally, in the agricultural 
implement industry, while manufacturers formerly took the 
note of the farmer, more recently, .with the change from a 
commission to a sale basis, they have taken instead the note 
or acceptance of the dealer. 

4. Exception is made in the case of terms employed on 
fixed capital goods sold to buyers who are unable to pay 
cash. Instances of such terms were given in the previous 
chapter, where it was seen that the general practice is to 
employ notes, as well as either to retain title to the ma- 
chinery or other goods or to use a chattel mortgage. 



CHAPTER IV 

DATINGS 

It is difficult to give a precise definition of datings, for 
the reason that in last analysis they are of several kinds. 
Their one point of similarity is the fact that they all serve 
to defer the due date of the bill. They provide for an 
additional period over and above that which would other- 
wise be granted by the regular terms, usually by indicating, ^ 
as Mr. William A. Prendergast says, that "the term of the 
credit does not begin to date until the expiration of the 
term of the dating. ' ' 1 But the dating may be expressed 
in several ways ; it may be for a greater or lesser period of 
time; and it may be given for one of several reasons. In 
consequence there are several different types of datings. 
Specifically, these are (1) season datings; (2) indirect 
datings; (3) datings on shipments to distant territories; 
and (4) competitive or extra datings. 

Season Datings. — The season dating provides a given' 
date from which commences the term of the credit. Thus 
wholesalers of dry goods generally grant on season pur- 
chases datings of April 1 or May 1 in the spring, and 
October 1 or November 1 in the fall. From these dates 
terms of 2 per cent 10 days commence, making such bills 
due April 10 or May 10 in the spring, and October 10 or v 
November 10 in the fall. By season purchases are meant 
purchases of goods to provide the stock which is to be 
worked off by the buyer during the selling season which 

1 Credit and Its Uses (New York, 1906), p. 114. 

56 



DATINGS 57 

follows. As has been seen in Chapter II, this means not 
only that the goods are both purchased and manufactured 
prior to the buyer 's active selling season, but also that they 
are actually delivered in advance of the season, and that 
the dealer then keeps them in stock until the season opens. 
The dry goods terms indicated above, therefore, generally 
apply only on shipments made prior to 2 months before 
the time of dating (February 1 in the case of an April 1 
dating), after which the regular terms apply. Thus, also, 
because cloak and suit manufacturers in the Cleveland mar- 
ket receive heavy orders in advance of the season, while in 
New York, goods are ordered rather for delivery as needed, 
no datings are given in New York, while many houses in 
Cleveland give season datings of March 1 and September 1. 
By means of the dating, account is taken of the buyer's 

c marketing period, 4 and due recognition is given in highly 

v seasonal industries to the periods of the year when his 
sales are made. The dating, therefore, represents an appli- 

. cation of the principle of the buyer's marketing period as 
a basis for terms to the case of seasonal industries. This 
refers only to those industries where datings apply to the 
stock order, and not to industries where the datings apply 
mily to sample goods, such as on sales of woolens and 

: worsteds by manufacturers. Where a dating is used, the 
manufacturer is therefore also relieved of the necessity of 
taking the risk of producing goods which he cannot sell; 
he shifts the burden of gauging market demand to the 
buyer instead. 

Advantages to the Seller. — There are other ad- 
vantages to the seller through producing the goods in 
advance of the season, shipping them out and granting a 
dating, instead of producing them as, or retaining them 
until, the buyer needs them. These advantages have been 
well stated in the following resolution of the Paint and 
Varnish Credit Club in 1918 : 



58 THE MECHANISM OF COMMERCIAL CREDIT 

Whereas, for a number of years the paint and varnish manu- 
facturers have offered spring datings for orders placed in the fall 
for shipment during fall and winter months, and 

Whereas, this privilege was offered for two reasons: 

First. To keep the plants running and the employees on full 
time during the winter months. 

Second. To avoid congestion in the plants during the busy 
spring months, and 

Whereas, This very liberal attitude of the manufacturers has 
resulted in the abuse of the privilege through the dealers placing 
a great many small orders, evidently for immediate consumption, 
with the expectancy of spring datings ; therefore be it 

Resolved, That this practice be stopped and that where it has 
been customary to grant spring datings, the manufacturers limit 
the privilege to one complete stock order, to be shipped at the 
option of the manufacturer after November 1. 

In certain seasonal industries it is absolutely necessary 
that the goods be produced in advance of the season, but 
in others, the manufacturer is given the option of length- 
ening the period within which he actively produces, and 
thus reducing his peak load. On the other hand, whether 
he shall ship the goods out and grant a dating or shall 
retain them himself until needed by the buyer, is entirely 
optional with him. He ma} 7 either ship them out at once 
or store them, as he sees fit. Thus, orders in the boot and 
shoe industry are taken for shipment on a given date, but 
the seller retains the privilege of prior shipment. If he 
ships them out, he bills the goods on the date called for in 
the order, in place of the date of shipment, and they carry 
the usual terms, without dating. In reaching a decision 
as to which of these two methods to use, a manufacturer 
must choose between the necessity of providing the addi- 
tional warehouse space required if he himself stocks the 
goods, and the danger involved in losing control over them 
if he ships them out. The extent of the danger depends 
largely upon the situation of the buyer with respect to the 



DATINGS 59 

factors discussed in the preceding chapter under the head 
of general competitive conditions. Shipping the goods out 
at once and granting a dating, also has the advantage of 
placing them in the dealer's hands at the earliest moment, 
so that he is able to meet at once any demands which may 
arise. In some cases it may result in dealers placing orders 
in advance of the season, instead of postponing buying until 
the goods are actually needed, and so may enable the man- 
ufacturer better to judge the demand. 

Illustrations. — Season datings are found in many lines. 
There will be given here merely some examples which 
illustrate, on the one hand, how closely terms may be ad- 
justed to the buyer's marketing period, and on the other 
hand, the relation which datings bear to the system whereby 
the article is marketed. The terms recommended by the 
National Implement and Vehicle Association undoubtedly 
represent the most complex structure of terms in exist- 
ence. Distinction is made between each of the principal 
classes of agricultural implements, and also between the 
different sections of the country. The country is divided 
into 4 zones — the central (which provides the standard), 
and the northern, southern and Texas. The time granted 
differs in the various zones, both according to the use of 
the implement in question in that particular zone and the 
time when crop returns are received. One implement may 
thus be classed with a certain group in the central zone, 
while in the southern zone it is classed with another group 
and bears a different dating, according to the special con- 
ditions in that zone. Another illustration is afforded by 
the datings employed by certain manufacturers in the 
garment industries. Some manufacturers of men's clothing 
grant a dating of November 1 on suits and a dating of 
December 1 on overcoats, while others specify May 1 on 
spring goods and June 1 on distinctly summer goods. Cer- 
tain manufacturers of women's cloaks and suits grant a 



60 THE MECHANISM OF COMMERCIAL CREDIT 

dating one month later on cloaks than the usual datings 
of March 1 and September 1, which they give on suits. 

The relation which datings bear to the marketing system 
is seen especially in considering changes in terms over a 
series of years. As a result of the shortening of manu- 
facturers' terms on agricultural implements in recent years 
(as well as of a fear of possible price declines), dealers 
are now said not to place as large initial stock orders as 
formerly, and direct shipments from factories to dealers 
have decreased, so that manufacturers are required to 
carry larger stocks at distributing points. A somewhat 
similar experience is reported by sole leather tanners. It 
has been stated that " about 10 years ago, terms were 5 
per cent 10 days, 4 per cent 60 days, with almost any dating 
a shrewd buyer would exact under abnormal market con- 
ditions. As the shoe manufacturing trade developed, the 
tanner became more and more both manufacturer and 
banker, and with increasing cost of hides, bark, etc., could 
no longer stand the strain." Terms were therefore finally 
changed to 4 per cent 10 days, 3 per cent 30 days, 2 per 
cent 60 days, net 90 days, generally with either 20 days 
extra, or with monthly settlement. Fixed buying periods 
are said by one tanner to have been largely obliterated since 
this change. Finally, several years ago a southern whole- 
saler of dry goods stated that he believed a change in 
marketing methods was occurring. He felt that, as a result 
of the improved roads which were being built, salesmen 
using automobiles would be able to call on their trade at 
least once every 60 days, and therefore it would be unnec- 
essary for retailers to buy season bills in advance, as had 
been the custom. As a result, the retailers would not need 
long time, and terms would become 2 per cent 10 days, net 
60 days from date of shipment. 

One-Season Industries. — A number of industries have 
two seasons a year — spring and fall — but a number have 



DATINGS 61 

only one season, either fall or winter, or spring or sum- 
mer, depending upon the particular article in question. 
The general principles which govern the fixing of the 
dating in one-season industries are substantially similar 
to those found in the case of two-season industries. Auto 
tires have already been cited. A spring dating is given 
in the case of winter shipments of them, while during the 
season, the regular terms are 5 per cent 10th proximo. The 
dating usually applies upon shipments from November 1, 
December 1 or January 1 to March 1 or April 1, and several 
forms of dating are employed, April 1 (and thus due date 
of May 10) being most common. 

The wall paper industry affords another good example of 
a one-season industry. Invoices of wall paper manufac- 
turers rendered between September 1 and February 1 carry 
the latter date, except in the case of invoices covering goods 
shipped on duplicate orders for fall and winter require- 
ments of goods of previous years' manufacture, which carry 
no advance dating. The object of the February 1 dating is 
said to be to induce dealers to accept goods as manufac- 
tured, and before they are actually required, so that the 
necessity of manufacturers maintaining extensive ware- 
house space is obviated. A somewhat similar situation 
existed in the straw-braid hat industry. Before the war, 
manufacturers booked the majority of orders from the 
early part of July to the early part of October for the 
entire season's business, running from July to July. Ship- 
ments were made at the discretion of the purchaser, and for 
many years terms were 7 per cent 10 days May 1 to the 
jobber and 6 per cent 10 days, 5 per cent 30 days June 1 
to the retailer. The bulk of shipments were made during 
March and April, necessitating storage by the manufac- 
turer until that time. In 1917, the three larger Baltimore 
manufacturers found great difficulty in making their ship- 
ments at the customary time, due to the prevailing 



62 THE MECHANISM OF COMMERCIAL CREDIT 

transportation conditions. In consequence, for the year 
commencing July, 1918, manufacturers with few exceptions 
decided to revise their methods, and to require that pur- 
chasers take the goods as they came from the factory. In 
order to encourage early purchase, shipment and payment, 
terms were changed to 10 per cent for payment on or 
before October 10, 1918, and a graded set of discounts, 
of the kind described more fully in the following chapter, 
was introduced. The discount decreased 1 per cent per 
month for later payment, thus making the lowest discount 
2 per cent for payment after May 10 and before June 10. 

Frequency of Purchases. — The principles just discussed 
are applicable also in the case of non-seasonal industries. 
The purchaser may stock up the goods, and thus place large 
orders at less frequent intervals, instead of placing a larger 
number of small orders as he needs the goods. At times the 
seller will consciously encourage this. One manufacturer 
of tissue paper, for example, desires to sell carload lots to 
western buyers in order to save freight, but purchasers in 
that section cannot sell the article as readily as in the East, 
so that it is necessary to extend them 30 days longer, in 
view of their slower turnover. In certain cases, too, a 
buyer in an industry where purchases are customarily made 
for current use only may instead stock the article, and 
receive additional time. Thus a note is taken, in place of 
the regular monthly terms, for foundry or domestic coke 
put in stock for future use. 

The entire question is related to the problem of the nature 
of the article, in particular whether it is rather for seasonal 
or for current use, as was mentioned in Chapter II. Some 
foodstuffs, for example, which are practically non-perish- 
able, are bought, as a rule, in larger quantities to cover 
the requirements of a longer period, and therefore carry 
longer terms than do perishable articles. The usual terms 
on fresh meats call for weekly payment, while the terms 



DATINGS 63 

on canned fruits and vegetables call for 2 per cent for pay- 
ment of sight draft, 1 1/2 per cent for payment on arrival 
or within 3 days thereafter or within 10 days from date 
of invoice, and net 60 days. But purchasing by the retailer 
in larger quantities and at less frequent intervals is by no 
means universally favored. A southern wholesale dry 
goods house has said that "we are encouraging frequent 
orders from our trade either weekly or at least semi- 
monthly, as we find our trade is more apt to keep their 
accounts in a satisfactory condition in this way than when 
they buy 2 or 3 bills a year, which necessitates a larger 
payment at one time." Similarly, a middle western whole- 
sale hardware house ascribes the efforts on the part of the 
wholesaler in that line to establish uniform terms and 
"what appears to be largely 2 per cent cash discount 
within 10 days' ' to a desire "to educate the retail trade in 
the necessity of discounting their bills and making a quick 
turnover of their business; in other words, purchasing in 
smaller quantities, paying promptly, etc." 

Indirect Datings. — Looked at in another way, in 
eases where the seller himself retains a previously manu- 
factured article until the buyer needs it, and then ships 
it out, the buyer may be said indirectly to receive a dating. 
Buyers have recognized this, and in certain cases have at- 
tempted to postpone the date of shipment in order to 
lengthen the terms. The smaller manufacturers of knit 
underwear are said to buy yarns through the smaller com- 
mission houses, and either to secure longer terms or to 
1 ' string out ' ' shipments which, it is commented, ' ' amounts 
to the same thing." Again, in the millinery braid indus- 
try, buyers adjusted the date of shipment so as to nullify 
an attempted change in terms. When manufacturers 
advised purchasers on March 1, 1920, that the former sea- 
son datings of April 1 and October 1 would be eliminated, 
the customers gave instructions to ship goods on January 



64 THE MECHANISM OF COMMERCIAL CREDIT 

1, making due dates and discounts 8 per cent February 10 
or 6 per cent April 10. 

On the other hand, sellers happening to be in a strategic 
position have attempted to shorten terms by specifying the 
date of shipment. Wholesale dry goods houses during the 
latter part of the war period definitely limited the time of 
shipment. Merchandise was scarce at that time and they 
were able to force acceptance of early deliveries by buyers. 
One wholesaler included in the 1918 survey of members' 
terms by the National Wholesale Dry Goods Association 
stated that "we have been accepting spring business for 
future shipment to be shipped not more than 30 days from 
date that the order is taken, ' ' and his customary terms of 
2 per cent 10 days, 1 per cent 30 days, net 60 days then 
applied. Another wholesaler stated that he applied the 
April 1 spring dating to advance orders where the customer 
for any reason wanted shipments held until, say, March 1, 
as well as to shipments made at the usual time in January. 

Shipments to Distant Territories. — In certain cases, 
additional time will be given in the case of shipments to 
distant territories. This is especially true of the Pacific 
Coast, where the additional time generally amounts to 
about 30 days, as well as to some extent of the South. The 
time may be granted either by specifying a definite date, 
similar to a season dating, by granting 30 days extra, by 
increasing the length of the regular net terms, or by basing 
the terms upon date of arrival instead of date of shipment. 2 
Many houses grant the additional time only for taking the 
discount, and the net period is measured from the date of 
shipment. 3 Manufacturers of cutlery grant 60 days on 
Pacific Coast shipments in place of the regular 30 days, 
and some producers of canned soups specify 1 1/2 or 2 

3 Arrival terms are at times designed as E.O.G. (receipt of goods) 
terms. 

3 Ettinger & Golieb, Credits and Collections (New York, 1917), 
p. 76. 



DATINGS G5 

per cent for remittance within 3 days after arrival, net 30 
days. By these means, cognizance is taken of the time 
required for the transportation of the goods, and the pur- 
chaser receives time sufficient to cover this period in 
addition to the regular net terms (based upon his market- 
ing period) which prevail in other sections. 

Competitive or Extra Datings. — The competitive or 
extra dating specifies a certain period which is to be 
granted in addition to that which would otherwise be 
granted by the regular terms. Manufacturers of men's 
clothing, for example, frequently grant 7 per cent 10 days, 
60 days extra, making the bill due in 70 days. In fact, 
where a dating of this kind is granted, the due date so 
specified represents the regular terms, and the dating has 
become an integral part of them. The dating, however, is 
frequently expressed only in the case of the discount period, 
while the net terms are quoted in the regular manner. 
Thus the regular terms of wholesalers of dry goods are 
2 per cent 10 days, 60 days extra, with net terms in many 
cases of 90 days or 4 months, although frequently no terms 
beyond the regular 70-day period are formally quoted. 

Prendergast 4 traces the origin of datings of this descrip- 
tion to the discontinuance of long time, such as 4, 6 and 8 
months. It is undoubtedly true that it is in industries 
where the time given is fairly long, that such datings are 
found, and the datings themselves are often not short. 
There are no datings of 10 days extra ; the shortest appear 
to be 20 days extra, which are employed by sole leather 
tanners in order to permit monthly payment, and most 
call for 60 days extra, a lesser number specifying 30 days 
extra. Moreover, such datings have appeared in certain 
lines where there has been a movement to shorten terms 
and abolish season datings. This was the case, for example, 
with manufacturers of carpets and rugs, who prior to 

4 P. 113. 



66 THE MECHANISM OF COMMERCIAL CREDIT 

about 1916 generally had terms of 4 per cent 10 days, with 
March 1 and September 1 season datings, whereas they now 
mostly have terms of 4 per cent 10 days, 60 days extra. 

But the general character of the industries in which these 
datings are found must not be neglected. In many of them 
the forces considered in the preceding chapter under the 
head of general competitive conditions bulk large in decid- 
ing what terms shall be employed. The datings which are 
given are the result, in part at least, of the operation of 
these forces, and the extra time granted reflects the general 
competitive conditions which prevail. 

On the other hand, to some extent there lies back of 
these datings an effort to adapt the time to the buyer's 
marketing period. Looked at from the buyer's side, this 
is an important factor, while from the seller's point of 
view, the general competitive conditions predominate. 
There is by no means a sharp difference in use between the 
season dating and the competitive or extra dating, and 
both may be employed side by side in certain industries, 
one serving as a counterpart of the other. Moreover, in 
the efforts to shorten terms to which reference has just 
been made, the adoption of a shorter extra dating in place 
of the former season dating, instead of eliminating entirely 
any dating whatsoever, in itself may be considered a rec- 
ognition to some extent of the need for adapting the time 
to the length of the buyer's marketing period. In some 
other industries where terms have been shortened, such as 
the manufacture of the finer men's shirts, the former extra 
dating remains on season orders and acts in place of a 
season dating in supplying the additional time required by 
the buyer on such purchases. 

Datings not Rigid. — Datings have been considered 
above as determined by the natural forces prevalent 
in the industry in question, especially the buyer's market- 
ing period and the general competitive conditions. But this 



DATINGS 67 

by no means implies that they are absolutely rigid and 
fixed. Rather are they flexible and subject to considerable 
change. It has just been noted that in recent years they 
have been either decreased or in extreme cases entirely 
abolished in industries where sellers have found themselves 
in a strategic situation. There has also been a marked 
change in the seasonal character of certain industries, and 
a corresponding effect upon datings. The fur industry 
formerly had only one season, but in recent years the 
fashion for summer furs has given the industry two sea- 
sons, and a dating of July 1 is now found in addition to 
the December 1 or January 1 dating on regular goods. 
During the past few years there has been an active and 
well defined movement on foot, sponsored by the Millinery 
Chamber of Commerce of the United States, looking 
towards the establishment of a twelve months' business for 
all branches of the millinery industry, with a resultant sale 
of seasonable millinery for each season of the year. This 
should have an effect upon the regular datings of April 1 
and October 1, which are at present found. 

Grouping of Transactions. — Allied to datings, and 
in a sense itself a form of dating, is the practice 
of grouping transactions and providing a single settlement 
date at regular intervals, instead of a succession of such 
dates, one for each individual transaction. The single 
settlement date is convenient for both buyer and seller. 
Particularly is this true in the case of active accounts, 
and so distinction is often made between them and inactive 
accounts, which bear the regular terms. Similarly, excep- 
tion is often made in the case, for example, of sales of 
foodstuffs to government institutions and to large corpora- 
tions, including railroad, lumber and coal companies which 
operate commissaries. In the latter case, bills are fre- 
quently rendered to the head office of the corporation, 
instead of to the office receiving the purchases. The single 



68 THE MECHANISM OF COMMERCIAL CREDIT 

settlement date is often named in connection with the cash 
discount period. Monthly settlement of active accounts is 
frequent, instead of settlement within 10 days, as in the 
case of inactive accounts with few transactions. Where this 
is done, 10th proximo or 10 days e. o. m. (end of month) 
will be specified, payment in both cases then being required 
by the 10th of the following month. The designation 
" proximo" is generally used in industries such as whole- 
sale groceries and auto tires, while the designation 
"e. o. m." is generally used in the various branches of 
the textile industry. The 10th is the most frequent date, 
although the 15th, 20th and 25th are also found. On the 
whole, a growing tendency towards the use of proximo 
terms appears to be reported in the leading wholesale lines. 
Grouping of transactions on less than a monthly basis 
is often found. Semi-monthly terms are used in certain 
cases on sales by wholesalers to retailers, such as in some 
sections in the confectionery industry. Similarly, fresh 
meats are usually sold on a weekly basis, and payment is 
required by a given day of the following week. In both 
these cases collections are often made by salesmen when 
they call upon the trade. This provides a ready collection 
medium for the seller, while at the same time the frequency 
of the salesman's visits, and thus of the buyer's purchasing, 
reflects the latter 's rate of. turnover and therefore corre- 
sponds to his marketing period. Similarly, practically all 
dealers in manufactured tobacco products discount their 
bills, because, except in the rural districts, the jobber 
usually calls on the retailer not less than once a week and 
often twice, and the latter thus buys his supplies from week 
to week. In fact, no cash discount is granted the small 
trade, but they are quoted instead prices on a net cash 
basis, with the discount already deducted. 



CHAPTER V 

CASH DISCOUNTS 

In the preceding chapters it was first considered that 
the buyer generally receives terms equal in length to his 
own marketing period. Subsequently it was seen that this 
period instead forms rather an upper limit, below which 
the terms may be swayed somewhat by the general com- 
petitive conditions prevailing in the industry in question. 
But in every industry certain buyers are in a peculiarly 
favorable position. They are able to pay cash at once, 
while many of their fellow competitors find it necessary to 
take time. They may either have the funds themselves, 
or else may obtain them from their banks, but in any event 
they are able to pay the seller cash. In fact, cash payment 
or discounting of bills is a prime test of credit standing 
in the United States to-day. In this way, the buyers in a 
given industry naturally divide themselves into two great 
classes, one of superior and one of lesser credit standing. 
This is true of most industries, but in some, notably the 
leading wholesale lines, it is the usual practice for almost 
the entire body of buyers to discount their bills. Such 
industries therefore must be distinguished from the general 
rank and file. 

Cash Discounts and Trade Discounts. — Discounts are of 
two kinds. Goods, for example, may carry a trade discount 
of 10 per cent, as well as a cash discount of 2 per cent for 
payment within 10 days instead of 60 days. On the 
surface, the difference between the two classes of discounts 
appears to be largely one of size, but in last analysis it 
goes somewhat deeper. The cash discount represents a 

69 



70 THE MECHANISM OF COMMERCIAL CREDIT 

deduction from the face amount of the bill of goods which 
is to be paid when the net terms are taken. The net terms 
supply a standard, and the cash discount is granted in view 
of payment at an earlier specified date. The trade discount, 
on the other hand, is granted irrespective of the time of 
payment, and represents a price adjustment, granted either 
to all buyers or to certain specially selected ones. It is 
immaterial whether goods are quoted at $90, or at $100 less 
a trade discount of 10 per cent There may be several 
such trade discounts, each deducted successively from the 
face of the bill after the previous one has been deducted, 
but this is never the case with the cash discount. With the 
latter, one discount alone is quoted for payment at a cer- 
tain time. The trade discount, even where only a single one 
is given, is generally larger than the cash discount. 

The distinction should not be confused by the fact that 
at times trade discounts have become stereotyped, and are 
in general use in a given industry, so that they have been 
incorporated into and become an integral part of the regu- 
lar structure of terms in that industry. This is particularly 
the case with graded discounts, which will be discussed 
later. Manufacturers sell woolens and worsteds largely 
upon terms of 10 per cent 30 days, 8 per cent 60 days or 
90 days and 7 per cent 4 months. The terms of 7 per 
cent 4 months correspond to the net terms usually found 
in other industries and actually represent a trade discount. 
Each of the other discounts contains two elements — a trade 
discount of 7 per cent and a cash discount equal to the 
difference between the quoted discount and the trade dis- 
count. Neither should the distinction be confused by the 
fact that in a few industries a trade discount may be in- 
corporated into the quoted discount if the purchaser so 
desires. Thus the New York City Garment Conference 
Council of Wholesalers and Retailers in July, 1917, rec- 
ommended terms of 8 per cent 10 days, 7 per cent 30 days, 



CASH DISCOUNTS 71 

6 per cent 60 days or so-called "net" terms of 2 per cent 
10 days, 1 per cent 30 days, net 60 days, the price being 
advanced correspondingly in the former case to compensate 
for the difference in the discount. 

Where the quoted discount actually includes a trade 
discount, the trade discount is given to all purchasers alike. 
In such cases, the seller merely adds it to his other expenses 
of production in order to obtain the price he quotes the 
buyer. The latter then in turn deducts it in order to 
arrive at the actual cost of the goods to him. It, therefore, 
represents merely a cumbersome price adjustment, and 
does not serve its true economic purpose. This is to keep 
commodity distribution in certain regular channels. The 
manufacturer generally grants the wholesaler a larger 
trade discount than he gives the retailer, or else grants the 
retailer none at all. This serves to provide the wholesaler 
with a minimum margin of profit, represented by the dif- 
ference between the trade discount he receives and that 
which the retailer receives. The wholesaler is accordingly 
protected, and his place in the process of distributing the 
article in question is recognized. This is the actual function 
of the trade discount. It has no direct relation whatsoever 
to credit matters. 

Nature of the Cash Discount. — Some authorities have at- 
tempted a more rigid definition of the cash discount. They 
hold that fundamentally it is a premium for prompt pay- 
ment, and not a discount in lieu of time, instead of 
recognizing both elements, as we have done. In fact, the 
National Wholesale Dry Goods Association for several years 
termed it a cash premium, and not a cash discount. The 
view has been expressed elsewhere as follows: "The cash 
discount is a premium offered by the seller to the buyer 
for anticipated payment of a bill not due. ' ' 1 The thought 

1 Proceedings, National Wholesale Lumber Dealers' Association, 
1917, p. 50. 



72 THE MECHANISM OF COMMERCIAL CREDIT 

is to stress the fact that the discount has as its purpose to 
secure prompt payment, instead of later payment at the 
expiration of the net period. As such, it represents a con- 
cession by the seller, and the period within which payment 
is required should be observed. Moreover, in order to se- 
cure prompt payment, the discount must be somewhat in 
excess of the current rate of interest, so that borrowing 
from the bank in order to take the discount is profitable. 
Where net terms are 30 days, a cash discount of 1/2 per cent 
10 days is not effective, but a cash discount of 1 per cent or 
2 per cent 10 days is. 

Furthermore, the maximum size of the cash discount is 
also limited. All buyers in any given industry are not 
in a position to discount their bills, and in some lines by 
far the larger part may take the net terms. In such cases 
there is no advantage in penalizing the buyer who cannot 
discount, and, at the same time, there is no gain in favoring 
the buyer who can. Theoretically, the size of the discount 
from the point of view of the seller who is amply able to 
borrow from his own banks should be determined by the 
current rate of interest to him, plus the cost of credit 
work on and handling of the accounts which do not dis- 
count, plus the bad debt loss experienced on such accounts. 
In any event, however, the size of the cash discount and 
the length of the net terms are closely and mutually inter- 
related. Once given the net terms, within broad limits 
the cash discount is determined, and vice versa. Each is an 
integral part of the terms structure. 

Relation to Terms. — Opposed to the view which has just 
been stated is the opinion held by some writers that the 
cash discount and the terms are entirely separate. The 
first, they hold, relates to a discount; the second, to time. 
These writers, in general, believe that little standardization 
of terms on the whole exists, and that the cash discount can- 
not be dissociated in actual practice from the trade 



CASH DISCOUNTS 73 

discount. Those who hold this view come in contact largely 
with those industries in which what have been termed 
general competitive conditions bulk largest in determining 
terms, and in which there is thus frequent bargaining, both 
as to length of net terms and as to size of discount. The 
size of the discount, they hold, becomes rather a price prob- 
lem. Instances which they cite in support of this 
contention include cases, for example, where a seller who 
quoted 8 per cent 10 days granted 9 per cent for spot cash. 
They also refer to the fact that terms in the case of tea 
and coffee sales by importers and roasters to jobbers and 
in the case of sales by trading jobbers in the textile lines, 
often vary according to the price quoted. 

The important point to remember in connection with 
such illustrations is that they are exceptions to the usual 
order of things. In last analysis, the cash discount and 
the price are entirely separate. The more this is recognized, 
the better is the basis on which industry finds itself. The 
credit problems constitute a distinct class, and should be 
treated separately. This is recognized by those associations 
which have considered the question and which have rec- 
ommended terms to their members. While some may call 
their committee one on " terms and discounts," the inter- 
relation of both is recognized, and no attempt is made to 
regulate one without regulating the other. Although these 
terms are not universally adhered to by any manner of 
means, even as a rule by any one member, nevertheless 
they represent a norm or standard for the particular in- 
dustry in question. The distinctive character of the credit 
problems, and the resultant interrelation of the discount 
and the net terms, have a sound basis in theory and are 
being recognized in actual practice to an ever increasing 
degree. 

Function,— As already noted, the use of a cash discount 
serves as a ready means of dividing buyers into two general 



74 THE MECHANISM OF COMMERCIAL CREDIT 

classes. It is somewhat higher than the current rate of 
interest, hence will be taken by every buyer who can 
possibly do so, either with his own funds or with funds 
borrowed from the bank. In other words, it is taken by 
those buyers whose credit standing is superior. It thus 
furnishes the seller with a means of judging the credit 
standing of his customers and also eliminates the credit 
risk on a considerable part of his accounts. 2 Thus it also 
enables him to concentrate his attention upon the poorer 
credit risks which do not take the discount, and hence tends 
to increase the efficiency of his credit work, at the same 
time that it curtails the total amount of such credit work 
and reduces the cost of the credit department. It should 
tend to decrease the amount of loss due to bad debts, al- 
though the proportion on accounts which run to the net 
period will naturally be larger than if no discount were 
granted, and the larger actual loss otherwise sustained were 
compared with the total sales. 

This is the situation from the mercantile point of view. 
It should, however, be remembered that, as most buyers 
do not have the cash themselves with which to discount their 
bills, they must turn to the bank. The use of the cash 
discount, therefore, results in having the buyer as far as 
possible obtain his funds directly from the bank, instead 
of having recourse to the seller through buying on time 
and taking the net terms. The bank then measures the 
credit of the buyer directly, and not the seller. The latter 
measures only the credit of the poorer accounts which do 
not take the discount, and himself borrows from the bank 
in turn in order to obtain funds with which to carry these 
accounts. He thus in effect guarantees such accounts to 
the banking system. He then has either a contingent lia- 
bility on receivables which he has rediscounted or a direct 

* This is of course more important in certain lines than in others. 
The longer the net terms, the more certain a cash discount. 



CASH DISCOUNTS 75 

liability for his own borrowings, whereas with the buyer 
who takes the cash discount he assumes no liability 
whatsoever. 

Length of the Cash-Discount Period. — Cash with order 
(C. B. D., or cash before delivery) is generally not required. 
Instead, the thought is rather to grant the cash discount 
for payment within a time sufficient to transport the goods 
from seller to buyer, and in addition to give the buyer an 
opportunity to examine them and to check them up with 
the invoice. This time accordingly governs the length of 
the cash-discount period. It varies considerably in the 
different industries. The necessity for it is determined 
largely by the nature of the article, and the general com- 
petitive conditions which exist in the particular industry 
in question. Standard goods do not require the same 
careful examination as do non-standard ones, nor are buyers 
in industries in which general competitive conditions are 
upon a high plane, under the necessity of insisting in all 
cases upon inspecting the goods before paying for them. 
Wholesale grocers in discounting bills regularly remit 
before the goods arrive. On the other hand, lumber needs 
careful examination, and elaborate provision is therefore 
made in the terms for taking the cash discount in the event 
that the car has not arrived within the specified cash dis- 
count period. The recommended terms of the National 
Wholesale Lumber Dealers Association permit the discount 
to be deducted for payment within the period of 80 per 
cent of the net amount of the invoice (estimated freight 
deducted). Prepayment of this sum does not forfeit the 
right to make corrections, and the balance is due within 
10 days after arrival and unloading. In other lines where 
inspection is desired, such as furniture, both the cash-dis- 
count period and the net terms are often lengthened in the 
case of shipments to distant territories, as was seen in the 
preceding chapter. 



76 THE MECHANISM OF COMMERCIAL CREDIT 

The cash-discount period is usually 10 days. In some 
cases, however, 15 days or 20 days may be specified, and 
monthly settlement is often permitted. In the latter case, 
the regular cash-discount period commences on the first of 
the following month, and proximo or e. o. m. terms are 
obtained, which represent a grouping of transactions. 
Further exceptions to the customary period occur in cases 
where salesmen are used to collect bills on their regular 
visits to the trade, which often leads to grouping on a less 
than monthly basis, and in cases where arrival terms are 
used. 

Methods of Quoting. — The cash discount may be quoted 
in any one of several ways. The usual method is as a certain 
percentage of the face amount of the bill, from which it is 
then deducted. In some wholesale lines, notably groceries, 
the discount is frequently averaged on a given bill of goods 
at a uniform figure, instead of deducting the specific per- 
centage on each individual item. As the discount on the 
average will be about 1 1/2 per cent, this amount is de- 
ducted, instead of considering whether each item falls 
within the 1 per cent or 2 per cent group. This practice is 
of course more convenient in billing. 

In various lines, however, a price differential, stating a 
definite amount in cents per unit of product, is quoted 
instead of a percentage. In the building supply lines, 
cement manufacturers formerly granted 2 cents per barrel 
for payment within 10 days from date of shipment, but 
increased the amount at the opening of 1916 to 5 cents per 
barrel as a result of the increase in the price of the product. 
In 1920, certain producers increased the figure to 10 cents, 
which was equivalent at the time to a little less than 3 per 
cent. "While some of the larger manufacturers of common 
brick grant a regular cash discount, which ranges from 
2 per cent to 5 per cent 10 days e. o. m., in certain localities, 
especially the far West, discounts as high as $1.00 per 



CASH DISCOUNTS 7? 

thousand have been granted for payment within 30 days 
from shipment, and a price differential of $1.00 is fre- 
quently quoted as between cash and credit shipments. 

A similar situation exists in the case of certain food- 
stuffs. In California, wholesale grocers allow a price 
differential on sales of sugar, although in the remainder 
of the country the regular discount is employed. Since 
August, 1918, this amounts to 10 cents 10 days per 100 
pounds, in northern California, and 10 cents for payment 
by the 10th and 25th, in southern California. In the case 
of flour, there is customarily a price differential, which 
generally amounts to 5 cents per barrel, and sometimes 10 
cents, for payment by sight draft instead of arrival draft, 
but this depends upon the distance the flour is shipped. 

Terms in the anthracite coal industry afford another 
illustration of price differentials. The company prices vary 
according to a regular schedule from month to month 
throughout the year, being lowest in the months of slack 
demand, in an endeavor to stimulate purchasing. As such, 
they may be considered to represent a price differential or 
discount which serves in lieu of a dating. Finally, in 
certain lines, such as on sales of tobacco products to small 
retailers, the cash discount is already deducted from the 
price, and the buyer is quoted only a net cash price. 

Another exception to the usual method of quoting cash 
discounts is seen in cases where the terms are quoted on 
one basis, but settlement is required on another. This is, 
however, somewhat rare, and the best example is afforded 
by terms on green coffee. A leading importer provides that 
on sales to domestic buyers in lots of 200 bags or more the 
basis shall be 90 days, less interest at the rate of 8 per cent 
per annum for unexpired time. Full settlement in any 
event, however, is to be made within 30 days, and a cash 
discount of 2 per cent (based on the rate of 8 per cent per 
annum for 90 days) for approximate amount in New York 



78 THE MECHANISM OF COMMERCIAL CREDIT 

funds is granted, when mailed by buyer on day of 
shipment. 

Size of the Discount. — Theoretically speaking, once the 
net terms and the current rate of interest are given, the 
size of the cash discount is fixed. In mathematical lan- 
guage, the one is a function of the other, so that the 
adjustment should be quasi-mechanical. But in actual 
practice the matter is not so simple. Various and complex 
forces are at work. Some range of variation therefore 
exists, within which the cash discount may differ from the 
theoretically fixed standard. This refers td the cash dis- 
count proper, using the word in its narrower sense. As 
has been seen, in addition to the cash discount proper, the 
discount actually quoted may include a greater or lesser 
element of the trade discount, even for payment at what 
is practically the net period. 

The factors which bring about this variation from the 
standard, or which cause a trade discount element to be 
injected into a cash discount, are in a broad way the same 
as those already considered as governing the length of the 
net terms. One of these factors has to do with the rate of 
turnover of the merchandise. Slower moving articles gen- 
erally carry a higher discount. This serves in a way to 
offset the longer time required and in addition to minimize 
the risk, as a larger proportion of accounts tend to discount 
their bills. The cheaper grades of merchandise frequently 
turn over more rapidly than *the 'better grades, and the 
discounts differ accordingly. Cheaper dresses are said to 
be sold largely on terms of net 10 days or 2 per cent 10 
days, but fine and medium grade dresses carry terms of 
8 per cent 10 days (in some cases with e. o. m. terms or 
30 days extra), and some extremely high priced dresses 
carry terms of 8 per cent 10 days or 7 per cent 10 days, 60 
days extra. The same difference is found in the fur indus- 
try. Manufacturers usually sell fine furs with a 7 per cent 



CASH DISCOUNTS 79 

discount, while they sell cheap furs for the winter season 
with a 2 per cent discount. They, however, sell cheap furs 
for summer with a 7 per cent discount, due, it has been 
suggested, to the fact that when the fur trade was a one- 
season business, special inducements were necessary to 
stimulate early orders, and these persisted even after the 
industry had assumed a two-season character. 

The Credit Risk. — The other factors may be considered 
largely as manifestations of the general competitive condi- 
tions which prevail in the industry. At the present place, 
it is unnecessary to consider the entire list already elab- 
orated in Chapter III. Instead, it will be better to select 
merely certain leading factors which have special 
application to the present problem. These factors are two- 
fold — the position of the buyer as a credit risk, and the 
position of the seller. 

As a general rule, the poorer the credit risk, the higher 
is the discount which is offered. By this means, the buyer 
has a greater inducement to pay cash, and a larger pro- 
portion of accounts accordingly tend to discount their bills. 
Where an industry sells to two classes of buyers, the 
discount to one group may therefore be greater than the 
discount to the other, although the net terms to both are 
the same. Manufacturers of lead products sell trade sheet 
lead and lead pipe on terms of 2 per cent 10 days, net 30 
days, while they grant a discount of only 1 per cent on 
chemical sheet lead and chemical lead pipe. The first class 
of items is sold largely to jobbers of plumbing supplies and 
to plumbers, while the second class is sold largely to the 
chemical trade. A 1 per cent discount is sufficient induce- 
ment to the large concerns of first class credit standing in 
the chemical trade to generally discount their bills, but it 
is insufficient in the case of jobbers of plumbing supplies 
and plumbers, to whom a 2 per cent discount is therefore 
granted. , 



80 THE MECHANISM OF COMMERCIAL CREDIT 

Partly as a result of this factor, in various industries 
the greater the degree of manufacture of an article, the 
larger the discount which is quoted. This is due to the fact 
that the buyers become smaller and poorer credit risks. It 
is due also to the fact that the more highly manufactured 
goods are bought in smaller lots and turn over more slowly, 
so that more time is needed to cover the marketing period, 
and hence a correspondingly higher cash discount. Terms 
and discounts in the iron and steel industry vary in this 
manner. Pig iron carries terms of net 30 days, semi- 
finished products such as billets, blooms and slabs and 
lighter rolled products carry the same net terms, but with 
a cash discount of 1/2 per cent 10 days, and wire products, 
sheets and tin mill products carry a cash discount of 2 per 
cent 10 days, while the regular terms of hardware manu- 
facturers are 2 per cent 10 days, net 60 days. 

Position of the Seller. — In discussing this question, the 
situation of the seller must be considered, as well as the 
situation of the buyer. If the seller's capital position is 
weak, he will be willing to offer a higher discount in order 
to secure cash payment, rather than to wait until the close 
of the net period. Some sellers of copper, for example, who 
have been in need of cash, have given a discount of 1/2 per 
cent at times in the past, although usually no discount is 
given. Similarly, the newer and smaller manufacturers 
of machine tools, in order to get funds quickly, are often 
said to offer a cash discount, which they discontinue after 
they have been in business several years and have 
become better and more firmly established. Similarly, 
manufacturers of mill supplies are often smaller than man- 
ufacturers of machine tools and are possibly not so well 
financed, so that the custom of offering a cash discount is 
much more frequent among them than among the machine 
tool manufacturers. 

On the other hand, the discount may vary with the 



CASH DISCOUNTS 81 

seller's margin of profit. The larger the margin, the greater 
the discount which he may grant, and conversely, the 
narrower the margin, the more closely restricted is the dis- 
count. This is well illustrated in the case of some of the 
millinery jobbers on the Pacific Coast who also sell various 
dry goods items. These, it is said, are sold on a much closer 
margin of profit than millinery, and terms on them are 
accordingly 2 per cent 10 days, 60 days extra, instead of 
the regular millinery terms of 6 per cent 10 days, 60 days 
extra (with season datings of April 1 and October 1). 
While this factor operates also in normal times, it is of 
special importance at a time when prices are rising rapidly. 
The increase in the cost of production as the prices of raw 
materials and labor rise, tends to reduce the manufacturer's 
usual margin of profit. The latter, therefore, tends either 
to raise his own prices correspondingly or else to decrease 
or eliminate the cash discount. Many manufacturers dur- 
ing the war period therefore adjusted their cash discounts. 

Net Terms. — Classified according to size, discounts may 
be considered as (1) non-existent, net terms alone being 
quoted; (2) low; (3) high or competitive ; and (4) graded, 
several optional periods with different discounts being 
quoted. Each of these classes will be considered in turn. 

In some lines, net terms alone are quoted. This is con- 
spicuously the case with merchandise which serves a 
manufacturer as raw material and is used by him — either 
as the chief material or as an auxiliary material — in work- 
ing up his finished product. Prominent among these 
articles are coal and coke, of which a regular supply is used 
currently. As was already seen, they generally bear terms 
of net 30 days, which in some cases are quoted on a proximo 
basis. Likewise, capital goods, such as machinery, railway 
equipment and ships, usually bear no discount. Where the 
amount is small, they are sold on net terms of 30 days, and 
where the amount is large periodical payments (without 



82 THE MECHANISM OF COMMERCIAL CREDIT 

discount) are required as the work progresses. In the latter 
case, litfle time is actually granted by the seller, while 
where net terms alone are quoted, the time granted is 
generally short. 

In several lines, what are in effect net terms are quoted, 
although a cash discount (which really represents a trade 
discount) is specified. Manufacturers of zinc sheets 
regularly quote terms of 3 per cent 10 days, while manu- 
facturers of auto tires regularly quote 5 per cent 10th 
proximo. In the former case, no net terms are generally 
quoted, while in the latter case, many manufacturers like- 
wise quote no net terms. Where a season dating is granted, 
a similar situation may exist. Some manufacturers of 
men's clothing, for example, merely quote 7 per cent 10 
days, December 1 and June 1. This has the advantage of 
enabling the seller to insist upon payment of accounts of 
financially involved customers at any time after the expira- 
tion of the initial 10-day period. It thus gives him a 
superior legal position, although in actual practice he may 
informally grant more time with correspondingly reduced 
or graded discounts. 

Low Discounts. — The scale of discounts most frequently 
found is on the basis of 1 per cent 10 days with net terms 
of 30 days, or 2 per cent 10 days with net terms of 60 days, 
although in a considerable number of cases a cash discount 
of 2 per cent 10 days accompanies net terms of 30 days. 
The discount is then at the rates respectively of 1 per cent 
for 20 to 30 days (or 12 to 18 per cent per annum), 2 per 
cent for 50 to 60 days (or 12 to 14.6 per cent per annum), 
and 2 per cent for 20 to 30 days (or 24 to 36 per cent per 
annum). These are the discounts found in some leading 
lines, both manufacturing and jobbing, such as groceries 
and hardware. At the same time, in lines where a higher 
discount is quoted, the differentials are usually at about 
the same rate, in particular 1 per cent per month. 



CASH DISCOUNTS 33 

In some lines, merely a nominal discount, such as 1/2 of 
1 per cent 10 days with net terms of 30 days, is quoted. 
Where this is the case, no large percentage of accounts are 
expected to discount their bills, as the inducement is very 
small. The discount is only equal roughly to the current 
rate of interest, and borrowing in order to take it is not 
encouraged. Bills will therefore only be discounted by 
large buyers who have considerable surplus cash. A buyer 
who purchases a variety of articles will naturally take full 
time on such items, and will first discount those bills on 
which the discount is most liberal. 

High or Competitive Discounts. — In other lines, high 
discounts are the rule. That is, the discounts which are 
quoted contain an admixture of the trade discount. The 
standard for manufacturers of woolens and worsteds, for 
example, has been 7 per cent 4 months. Discounts of this 
kind usually range up to about 10 per cent, although cases 
are recorded up to 16 per cent, and the lower figure may 
be placed at about 5 or 6 per cent. While these high dis- 
counts are often associated with a long net period, 
especially in the textile and apparel lines, this long net 
period, as has been seen, is due largely to the general com- 
petitive situation in these industries, and so also directly 
are the high discounts quoted. They represent to a 
considerable extent a concession by the seller. In some 
lines the discounts are adjusted more closely to the length 
of the net terms quoted, but in other lines such as those 
just cited the competitive situation either leads to deviation 
from this standard, or else injects a trade discount feature 
into both the cash discount and the net terms as ordinarily 
quoted. The discount on the whole is apt to be larger in 
lines where the product is purchased for resale in the same 
form, and not for further manufacture. A greater differ- 
ential is obtained, and this is of more importance than 
where a manufacturing process by the buyer intervenes. 



84 THE MECHANISM OF COMMERCIAL CREDIT 

High discounts often tempt the buyer, in particular the 
retailer, to abuse the terms. He buys on one basis and 
endeavors to settle on another. Cases are frequently men- 
tioned where a buyer who pays at the close of the net period 
deducts the discount and adds interest for the time taken. 
Mr. Ira D. Kingsbury in a paper on Datings and Discounts 
read before the National Association of Clothiers in June, 
1914, gave details as to how some retailers of men 's clothing 
had succeeded in obtaining such concessions from the 
manufacturers. Similar complaints are heard in other 
industries. 

Department Store Discounts. — The department store in 
the past has generally preferred to buy on a high discount 
basis, and instances of 10 per cent and over are recorded. 
Its buyers have been instructed to purchase in this manner. 
Especially are such discounts*found in the case of luxury 
items which involve large amounts and on which the retail 
price is not closely figured. The store charges the items 
to the respective departments at their total price 
(neglecting the discount), and the resale price is figured 
on this basis. This leaves a considerable margin which goes 
towards meeting the overhead expenses of the store. This 
system of purchasing is susceptible of considerable abuse, 
and certain stores are generally stated to take advantage 
of their position .and force weak sellers to grant large dis- 
counts. An authority in the dress and waist industry told 
the writer that he knew of concessions "all the way up to 

16 per cent and paying for 's advertising." Such 

tactics, however, are by no means employed by all stores. 
Other stores are just as frequently pointed to as always 
buying on the regular terms prevailing in the various 
industries, #nd do not endeavor to obtain concessions of 
this kind. 

Graded Discounts. — What may be termed graded dis- 
counts comprise a special class of discounts. Instead of 



CASH DISCOUNTS 83 

quoting merely one cash discount for payment within a 
certain period, and one set of net terms, several cash dis- 
counts are quoted, declining in size as the period increases 
in length. The number of discounts may or may not be 
such that terms at the longest period are strictly net. Some 
wholesale dry goods houses, for example, quote terms of 
2 per cent 10 days, 1 per cent 30 days, net 60 days, while 
the recommended terms of the Broad Silk Manufacturers 
Division of the Silk Association of America call for 6 per 
cent 10 days, 60 days extra, 5 per cent 90 days, 4 per cent 
four months, etc., until net terms of 8 months are reached. 
Furthermore, woolen and worsted manufacturers often sell 
on terms of 10 per cent 30 days, 8 per cent 60 days or 90 
days, and 7 per cent four months, and in this case, as has 
already been remarked, a trade discount element is intro- 
duced. Where graded discounts are quoted, the poor 
credit risk may not be quoted all the options, but may 
merely receive, for example, 10 per cent 30 days or 8 
per cent 90 days, the better risks alone being quoted the 
other option also. That is, relating the matter to the 
principle of the marketing period, the period of the poor 
credit risk should be shorter. This is only fair, inasmuch 
as, in the interest of safety, he should have a quicker 
turnover. 

But consider, rather the discount. The graded discount, 
with its several options, serves to divide the burden of 
carrying the article between the seller and the bank. It 
invites the buyer to borrow what he can, in order to take as 
large a discount as possible. He thus carries the article 
(through the bank) as long as possible, and the seller car- 
ries it for the remainder of the marketing period. To 
accomplish this purpose in the most effective way, the 
discount should be graded scientifically, and should be 
regressive. That is, it should be more worth while to a 
buyer to pay in 10 days rather than in 30 days, than for 



86 THE MECHANISM OP COMMERCIAL CREDIT 

him to pay in 3Q days rather than in 60 days. A scale of 
discounts roughly along the following lines should be 
employed : 

First 30 days l 1 /^ per cent, or roughly 3% per cent cash 
Second 30 days 1^4 per cent, " " 2^ per cent 30 days 
Third 30 days 1 per cent, " " 1 per cent 60 days 

with net term of 90 days 

By this means the best results would be obtained, while at 
the same time, if the differences between the discounts for 
the different periods were not too great, the small buyer 
would not be penalized too heavily. In actual practice, 
however, this plan is by no means followed, and discounts 
for successive periods are generally equal, the decline 
usually being at the rate of about 1 per cent per month. 

Anticipation Rates and Past-Due Rates.— Where the 
buyer does not pay within the cash discount period, yet 
anticipates or pays prior to the net period, some concession 
is made. In certain ways, the rate of anticipation which is 
allowed is allied to the cash discount. The rate at which 
anticipation is permitted is generally not, however, as high 
as the cash discount, and it is usually expressed in the 
same way as interest rates, namely, at so many per cent 
per annum. In fact, it often is 6 per cent, the legal rate 
of interest in many states. On the other hand, in many 
cases it is somewhat higher; 8 per cent is rather frequent, 
and 12 per cent has been found. In some cases, where a 
low rate is granted for anticipation of fairly long terms, it 
may almost penalize the buyer who anticipates instead of 
taking the first period specified. A buyer who anticipates 
the broad silk terms of 6 per cent 10 days, 60 days extra, 
does so at the rate of 6 per cent per annum, while if he takes 
additional time beyond 70 days the cost to him, as has been 
seen, is 1 per cent per month or 12 per cent per annum. 

The terms quoted often also specify the rate of interest 



CASH DISCOUNTS 87 

which shall be paid in case the account runs beyond the 
net terms, although this is just as often not done. The rate 
generally appears to be 6 per cent. In any event, of course, 
the legal rate of interest would apply, so that no specifi- 
cation is actually needed. 



CHAPTER VI 

TERMS IN RELATION TO BUSINESS CONDITIONS 

Certain standards in net terms tend to become estab- 
lished as a result of the three forces which were considered 
in Chapters II and III. and so also certain corresponding 
cash discounts. But over a series of years the standards 
themselves regularly change. Aside from a long-run ten- 
dency in one direction, which goes on steadily for an ex- 
tended period, there is a rhythmic ebb and flow over shorter 
periods of time. Terms now lengthen and now shorten. 
This wave-like movement occurs in response to changes in 
general business conditions. Terms vary in accordance 
with, and parallel the course of, the business cycle. The 
movement manifests itself in several ways. It occurs much 
more largely in the terms quoted by individual houses than 
in the regular terms in the different industries which have 
a tendency to remain fixed. But it occurs even more 
largely in the manner in which such terms are observed. 
This is reflected in the percentage of accounts which dis- 
count their bills and in the promptness of collections. It 
is in these directions that the principal changes occur. 

The Business Cycle. — The best current thought as to the 
course of business conditions recognizes the existence of a 
business cycle, which contains in a broad way three stages : 
(1) prosperity, (2) crisis and (3) depression. The course 
of business is continuous. There is a steadily changing 
process ; business passes through each stage in turn until it 
gradually reaches the next, and when one cycle is com- 
pleted another begins all over again. In any one cycle 
there is first a period of revival which turns after a while 



RELATION TO BUSINESS CONDITIONS 89 

into cumulative prosperity. The past activity of business 
leads to greater and still greater activity. But in the course 
of this acceleration of activity serious elements of weakness 
develop in the business structure and system, and these 
in time are sufficient to cause a change. From being on the 
up-grade, business activity turns to the down-grade. As 
activity cumulatively lessens, business enters a second stage. 
The change is either gradual, as in the United States in 
1920, and is termed a crisis, or it may become spectacular, 
as in 1907, and degenerate into a panic. Following this 
second period is a third, that of depression. In this period 
the cumulative readjustment of business proceeds, and the 
commercial and industrial community gradually puts its 
house in order. At length, business emerges from the third 
period and enters the first stage of a new cycle. A new 
period of revival and prosperity commences. 

The course of the cycle has been sketched in merest out- 
line. 1 No sharp lines actually exist which divide one 
period from another, and the several periods blend into 
each other. The length of any two cycles is by no means 
the same, and no fixed length may be assigned to any of 
the stages in the cycle. The process of change manifests 
itself in a great variety of ways, and its effects are many 
fold. They are found in production, in trade and in 
prices, no less than in banking and in credit. 

Terms and General Business Conditions. — Credit alone 
concerns us here. It is necessary to trace its course in 
detail throughout the three stages of the cycle. Take first 
the period of prosperity. It is generally held that, as busi- 
ness activity increases and prices rise, it becomes more and 
more attractive for the business man to borrow as much as 
possible, instead of relying merely upon his own capital. 2 

*See Mitchell, Business Cycles (Berkeley, 1913). 
J See Veblen, Theory of Business Enterprise (New York, 1915), 
Chap. iv. 



90 THE MECHANISM OP COMMERCIAL CREDIT 

He is enabled to expand his scale of operations and thus to 
share to a greater degree in the existing prosperity, at the 
same time that his costs are lessened, due to the fact that 
the capital so borrowed obtains only a fixed interest re- 
turn. He is able to borrow because of the increase in the 
capitalized value of his enterprise as a result of the increase 
in anticipated profits. Consequently, the volume of credit 
outstanding is pyramided, and tends to increase much more 
rapidly than the volume of goods which are produced, until 
finally a break comes. 

Which direction does this credit extension take? It has 
at times been stated that at the end of a period of credit 
expansion business houses prefer to buy on time, and an 
expanded network of mercantile credit is consequently 
found. This would seem to imply that, due to a desire for 
an increased volume of business, sellers have granted addi- 
tional time in order to stimulate sales. But during the 
period of prosperity, merchandise is in good demand and 
sales are made readily. A seller's market is found, and 
goods may become scarce in certain lines. Moreover, as 
prices rise a strain is placed upon the seller to finance him- 
self. This is especially the case with the manufacturer, 
for it is well known that increases in the prices of raw 
materials and semi-manufactured goods generally tend to 
outrun increases in the prices of manufactured products. 
Only in the case of industries in which considerable trading 
develops, and much speculation accompanies the rising 
prices, would it appear that terms might lengthen some- 
what. On the whole, therefore, terms would appear to 
shorten instead, and the increased volume of credit would 
appear to result from borrowing by buyers direct from 
banks in order to take cash discounts. In other words, in 
the credit structure business houses are tied directly to 
the banks during the period of prosperity, rather than to 
other business houses. In fact terms tend to be shortened. 



RELATION TO BUSINESS CONDITIONS 91 

This condition prevails until just prior to the crisis or 
turn in business conditions. As business hesitates, the 
sellers lose their domination over the market, and may well 
lengthen terms somewhat as an inducement to keep up 
sales. The situation is very complex, and it is difficult to 
locate the exact moment of change, in particular with re- 
spect to terms. It is likewise difficult to determine the 
exact relation in point of time between the change in terms 
and the change in general business conditions. When the 
new trend of business in the reverse direction is definitely 
ascertained, or at least the check to the upward movement, 
terms at first may again well be somewhat shortened. 
Prices are falling, conditions are uncertain and business 
men are hesitant. 

As business passes through the third stage, that of depres- 
sion, terms distinctly tend to lengthen. Sellers no longer 
control the market, and hence offer such concessions to 
buyers. The instinct of caution is overcome by the desire 
for business. Moreover, the buyer's turnover is less rapid 
and his marketing period is correspondingly longer than 
when times are brisk. At the same time, after the process 
of liquidation is completed, sellers possess surplus funds 
which are available to extend this additional time. All 
these forces make for longer terms. The point of maximum 
length is perhaps reached shortly after the opening of the 
new period of revival and prosperity. The older long terms 
are continued somewhat into the new period and help to 
stimulate it and bring about the change in the course of 
business. Once prosperity is firmly established, terms again 
shorten and the cycle commences all over again. 

Movement of Terms in Particular Industries.— This sit- 
uation with respect to conditions in general is merely a 
reflection and a synthesis of the conditions which prevail 
in a host of individual industries. In each of these, market 
conditions and the relations of demand and supply likewise 



92 THE MECHANISM OF COMMERCIAL CREDIT 

show a wave movement over a period of time, entirely apart 
from the normal relation between buyer and seller con- 
sidered in Chapter III. At times a buyer's market exists, 
at times a seller's market. The terms in use vary accord- 
ing to these changes. Different lines differ in the degree of 
responsiveness of terms to market conditions, and in some 
lines terms are much more flexible than in others. Par- 
ticularly responsive are those industries in which there is 
considerable trading in an unorganized open market. The 
movement of terms in this manner is well recognized in 
certain industries, and the war period further served con- 
spicuously to point out the fact in others, as will be seen in 
more detail later. ,Prime western zinc, for example, was 
scarce during the early part of the war period, and pro- 
ducers' sales accordingly were almost wholly on sight draft, 
but since the middle of 1917, it has been in free supply 
and leading consumers have been able to re-establish the 
former terms of net 10 days to net 30 days from date of 
shipment. In a totally different industry, a Boston whole- 
saler of anthracite coal states that when conditions are 
normal, considerably over 30 days is often extended, but 
in times of shortage retailers collect more promptly and 
thus are enabled in turn to pay wholesalers more promptly. 
Discounts and Business Conditions. — The situation with 
respect to the length of net terms which has been described 
should appear to be reflected in the situation which exists 
with respect to the rate of cash discount quoted. Such 
rates, however, are related not merely to the length of the 
net terms, but also to the current rate of interest. During 
the period of prosperity, interest rates gradually increase 
as business becomes more active and the demand for funds 
increases. They reach a peak during the second or crisis 
period, and then fall during the period of depression, reach- 
ing a low point at the opening of the period of prosperity, 
when they aid in preparing the way for the revival which 



RELATION TO BUSINESS CONDITIONS 93 

takes place. Thus not only do the net terms change in 
response to the course of the business cycle, but the relation 
between the length of the net terms and the size of the 
cash discount also changes as the current rate of interest 
changes in accordance with the course of the cycle. 

Considered with respect to their influence upon the size 
of the discount, these two influences operate in opposite 
directions, and tend to offset one another. While interest 
rates rise during the period of prosperity, and thus tend to 
increase the rate of cash discount, the net terms shorten, 
and therefore tend to decrease the discount. The reverse 
is the case during the period of depression. In other words, 
these two influences tend to keep the discount constant, or 
at least to introduce a certain measure of stability into it. 
However, the adjustment between these forces is by no 
means perfect, and it is even more difficult to trace the 
changes in the discounts actually quoted than it was in 
the case of the net terms. 

In actual fact, there is no great nicety of adjustment in 
discount rates. They are generally relatively large in size 
as compared with current interest rates, and the pressure 
for funds which exists is probably a more potent force. The 
influence of business conditions is accordingly seen rather 
in the changes which occur in the percentage of accounts 
taking the discount. High interest rates reflect " tight " 
money. As funds become more difficult to procure, it be- 
comes necessary for the buyer to take the full net period 
and let his accounts run until maturity, instead of dis- 
counting them. At the same time, the seller desires pay- 
ment as promptly as possible, and may actually increase 
the discount in order to induce discounting of bills instead 
of payment at the close of the net period, in spite of the 
fact that he shortens the net period itself. 3 At the peak of 

3 Other considerations may also enter. The seller may decrease the 
discount in order to keep prices down as much as possible. 



94 THE MECHANISM OF COMMERCIAL CREDIT 

the period of prosperity, this conflict between the interests 
of buyer and seller is most accentuated. When activity 
decreases after the crisis and business definitely enters the 
period of depression, interest rates decrease as the demand 
for funds diminishes, and the percentage of accounts taking 
the discount tends to increase. 

Wartime Changes. — The war period represents a dis- 
tinctive epoch in the history of terms of sale in the United 
States. At that time two influences came together. On the 
one hand, the period of prosperity in the business cycle was 
present in accentuated fashion. There was a heavy demand 
and a strong sellers' market, in general, and especially in 
the case of certain individual commodities. That part of 
the changes in terms during the period was due to changes 
in general business conditions is seen from the fact that 
terms in certain lines which were shortened have again 
tended to lengthen as the post war change in business con- 
ditions has become evident. On the other hand, throughout 
the period there continued a movement to shorten terms, 
which had previously made its appearance. These two in- 
fluences were in the same direction and tended towards the 
same ends. They thus served to re-enforce each other, and 
to bring into extra strong relief the tendencies in terms 
which resulted from them. 

In part, these war changes were made at the instance, or 
under the encouragement, of organizations designed to aid 
in furthering the prosecution of the war. It was urged that 
the greatest possible efficiency should be obtained in the 
credit and financial system, as well as in other fields. This 
it was proposed principally to accomplish in two ways: (1) 
through the use of the trade acceptance system, which will 
be discussed at greater length later, and (2) through a 
shortening of credits and prompter collections. By the 
latter means, the merchant would obtain quicker turnover 
of his capital, and maximum use might be made of the 



RELATION TO BUSINESS CONDITIONS 95 

funds available to finance the larger volume of business 
done. The chairman of the committee on commercial 
economy of the State Council of Defense of Washington, in 
an address before the wholesale grocers' association of that 
state at Tacoma on October 11, 1918, stated that business 
should get as near a cash basis as possible, advocated a 
"pay-as-you-go" policy for retailer as well as consumer, 
and proposed that terms be limited to 30 days with a dis- 
count period of 10 days. The adoption of a proposal of 
this kind undoubtedly would result in curtailing the volume 
of credit, especially on the poorer risks. On the other hand, 
it would merely have a tendency to make the intermediate 
risks deal directly with a bank as far as possible in order 
to obtain funds, instead of, as at present, buying on time 
from a business house which itself must borrow from a bank 
in order to carry them. There would be no effect upon the 
best risks, as they at present already go direct to the bank. 
Types of Changes. — The actual changes in terms during 
the war were most pronounced in two types of lines. They 
were especially apparent in industries in which there was 
a strong scarcity of goods. This was notably the case in 
various branches of the textile industry. Here the short- 
ening of terms appeared in various forms. The season 
dating which had been previously granted on certain items, 
such as underwear, was eliminated. On other items, terms 
were shortened by some sellers to as little as 10 days, and 
buyers were required to take the goods at once, instead of 
having them delivered only as they desired them. They 
might therefore, for example, receive goods in the spring 
several months before they actually needed them, and thus 
an increased burden would be placed upon them. This 
situation was vividly depicted by Mr. Thos. A. Fernley, 
Secretary of the National Wholesale Dry Goods Associa- 
tion, in a "Market Service Letter" to his membership 
under date of April 28, 1920, reading in part as follows : 



96 THE MECHANISM OF COMMERCIAL CREDIT 

It is only since the war period that an intensive sellers' market 
has caused a withdrawal of the reasonable terms and discount 
arrangements by the manufacturers, commission houses and selling 
agents. 

Coupled with the restrictions in terms has been the demand 
that the wholesaler take goods far in advance of the season for 
immediate payment where such goods are sold on 60 days' terms, 
making it necessary for the wholesaler to strain his financing 
arrangements to the limit to finance not one, but two or three 
seasons' goods at the same time. 

One wholesale dry goods house reports that they now have in 
stock, or on the way or on order and quite certain of shipment, 
four million dollars' worth of merchandise which is payable before 
June 1st. 

This wholesaler further states that a considerable quantity of 
this merchandise is sold to the trade with October 1 dating. Fur- 
ther, that later on, they will be called on to take in another 
season's goods far in advance of the time they are needed. 

It should be borne in mind that the manufacturers are not 
solely to blame for present conditions as the buyers have in many 
instances urged the manufacturers to make advance deliveries for 
fear of a shortage later, and other buyers have felt obliged to do 
likewise in order to protect their interests. 

The wholesalers consider it an increased hardship to be asked 
to take in fall merchandise during the months of January, Feb- 
ruary and March and pay for the goods in 10 days, making the 
average fall purchases payable February 10, and in turn hold 
the goods until at least September, or 7 months, and then bill 
them at 2-10 60 estra, the retailer making payment for these 
goods from 9 to 10 months after the wholesaler has paid the bill. 

The wholesalers' warehousing difficulties in being called on to 
purchase and receive merchandise costing 3 times the normal price 
and carrying it in stock for 9 months without being able to ship 
it, are as obvious as the financial side of the question. 

It would appear to be a case wherein the manufacturer foregoes 
the necessity of taking any chance, and the retailer declines to 
accept the risk, leaving the wholesaler to assume and bear the 
burden of both. 

The wholesaler is aware of the fact that the average retailer 



RELATION TO BUSINESS CONDITIONS 97 

will not take in fall merchandise in the spring, and even if he 
were willing, the credit situation might make such a policy unwise. 

An analysis of their financing requirements by some of the 
wholesalers indicates that the present tendencies on the part of 
the manufacturer make necessary the financing of about 2 /z of 
the wholesaler's business in 2 months' time and that such a 
necessity forces the wholesaler to limit his purchases in order to 
meet the situation satisfactorily in a financial way. 

Some mills, although quoting 60 days' terms, have attached high 
rates of anticipation which must be figured in the cost, and no 
jobber can afford to take advantage of the 60-day term, prac- 
tically making the bill a 10-day matter. 

A summary of the foregoing was presented to several manu- 
facturers who conceded the fact that many of the strictly war 
measures had been found so advantageous to themselves that they 
had been continued, even though the war was practically over. 

In the woolen and worsted industry after 1917, manu- 
facturers who had been selling on terms based upon 7 per 
cent 4 months tended to reduce the maximum time granted 
to either 30 or 60 days, while the season dating was also 
frequently eliminated. Certain manufacturers who had 
been selling on terms of 10 per cent 30 days took advantage 
of the opportunity to eliminate the discount, and hence- 
forth quoted terms of net 30 days, although this made no 
difference in the time actually granted. At the end of 
1920, however, a tendency to revert to the older terms 
appeared as a result of the lessened demand for goods. 
During the war period the discount was decreased in other 
lines. A tendency in this direction was marked, for ex- 
ample, in the case of hardware manufacturers. 

The changes were also especially pronounced in those 
lines in which goods are purchased for resale. The whole- 
saler is the chief of such buyers. As was indicated in the 
quotation from Mr. Fernley, he feels that he is crushed 
between the upper and the lower millstone. The larger 
wholesale lines, especially dry goods and hardware, appear 
to have been affected to a considerable extent. On the 



98 THE MECHANISM OF COMMEKCIAL CREDIT 

other hand, the manufacturer who buys an article which 
he uses in producing another article does not feel the same 
pressure, and is less concerned with the terms which are 
quoted him. In lines where manufacturers sell both to 
wholesalers and to other manufacturers, and especially 
where sales to other manufacturers are of major impor- 
tance, terms may be fixed by the selling manufacturers 
regardless of the wishes of the wholesalers. This has been 
the case in various lines. Selecting several illustrations at 
random, wholesale grocers were unable to obtain a cash 
discount from packers in 1907, while in the early part 
of the war period, manufacturers of bolts and nuts reduced 
their terms from 2 per cent 10 days, net 60 days to 1 per 
cent 10 days, net 30 days, in spite of the opposition of the 
hardware wholesalers, and several years ago wholesale 
druggists were unable to obtain the terms desired from 
manufacturers of white lead. 

The Tendency to Shorten Terms. — For some time prior 
to the opening of the war, movements had been under way 
in various industries to shorten terms. After the cash dis- 
count-open account system had succeeded the former note 
and draft system in the United States, the terms em- 
ployed in many lines were long, and customary settlement 
dates of the kind described above in Chapter II were found. 
Prior to about 1900, as has been seen, long terms were in 
use in the steel industry. These were changed at the open- 
ing of the century in various branches to substantially their 
present basis, although a few, such as bolts and nuts, have 
since been further shortened. In the 90 's a movement was 
already on foot among various hardware manufacturers to 
introduce net 30-day terms, but the opposition of the whole- 
salers resulted in the retention of the regular terms of 2 
per cent 10 days, net 60 days. The movement only ap- 
peared again after the outbreak of the war in 1914, and 
took the form rather of decrease in or elimination of the 



RELATION TO BUSINESS CONDITIONS 99 

discount by certain manufacturers. Particular force was 
lent to the movement at that time by the advance in the 
prices of various hardware articles as the cost of production 
increased, and by the existence of a sellers' market. With 
the passing of war conditions, however, the movement lost 
force, and in 1918, the wholesalers' body, the National 
Hardware Association, stated that "many of the manufac- 
turers who changed their terms during the past year rein- 
stated the discount. ' ' 

A similar situation existed in other lines. Shortening of 
manufacturers' terms on woolens and worsteds is stated by 
some authorities to date back to the 90 's. Prior to about 
1893, practically all woolen goods were distributed through 
the old fashioned commission houses and terms were almost 
uniformly 10 per cent 10 days, 9 per cent 30 days, 8 per 
cent 60 days and 7 per cent 4 months, with season datings of 
June 30 and December 31. In that year, the present system 
of separating the merchandising and financial ends of the 
distribution of woolens began, and the largest of the old 
commission houses gradually dropped the merchandising 
end of the business and confined themselves to acting as 
factors. At the same time, gradual shortening of the long 
dating originally given by these houses took place. Little 
agreement exists among various authorities as to the details 
of this movement, and it is variously stated as having been 
found during the past decade or since about 1905, or as 
being particularly marked since about 1912. At the latter 
date there was a movement of manufacturers away from 
commission houses, and it is stated that these mills largely 
employed terms of net 30 days. The subsequent changes 
after the opening of the war have been sketched in the pre- 
ceding section. 

For some years prior to the war, wholesale grocers had 
likewise endeavored to shorten their terms. In the classifi- 
cation of items according to terms and discounts allowed, 



100 THE MECHANISM OF COMMERCIAL CREDIT 

efforts were made to bring certain items from the 60-day to 
the 30-day column, and others from the 30-day to the net 
column. Strong emphasis was likewise placed upon the 
need for prompt collections. The monthly reports of out- 
standings which certain of the associations prepare, show- 
ing the percentage of bills and notes receivable outstanding 
on the first of the month to the previous month 's sales, have 
had as one of their primary purposes to afford an indica- 
tion of the extent to which closer collections are being made 
and terms are being shortened. 4 As a result of this move- 
ment, the period of credit has been greatly decreased in 
various sections. This is shown by the following 
percentages : 

Fifteen Colorado Grocers 

Average first 6 months. 1916 141.2 

135. 



it 


last " 


i a 


tt 


first " ' 


1917 


tt 


last " ' 


( u 


tt 


first " < 


1 1918 


tt 


last " ' 


i a 


it 


first " ' 


1 1919 



130. 

125.7 

123.4 

117.9 

112.5 



About 30 California Grocers 



Average end of January, 1917 136.8 

" " " July, * " 128.7 

" " " January, 1918 125.8 

July, " 115.3 

January, 1919 106.0 

July, ' " 105.4 

January, 1920 97.5 

July, " " 100.2 

January, 1921 101.7 

July, " 95.2 

January, 1922 97.4 

June, " 95.9 

4 See, for example, the addresses and articles of Mr. F. C. Letts, 
President of the Western Grocer Company, Chicago. 



u 


u 


It 


it 


u 


it 


tt 


u 


tl 


u 


it 


a 


tt 


tt 


u 


tt 


tl 


tt 


it 


it 


u 


u 


u 


tt 



RELATION TO BUSINESS CONDITIONS 101 

A percentage of 100 means that outstandings equal one 
month's sales. Colorado grocers thus were able to reduce 
their outstandings from 42 days' sales to 34 days' 
sales between 1916 and 1919, while California grocers have 
been able to reduce their outstandings since 1917 from 41 
days' sales to about 29 days' sales. Even greater de- 
crease of the percentage of outstandings has occurred in 
some other territories. The lowest average percentage for 
1921 was shown by Indiana grocers, their figure being 70.7 
per cent, equal to somewhat over 20 days' sales. 

Other instances of the shortening of terms might be 
multiplied, such as the breakdown of the customary settle- 
ment date on wholesale hardware sales in the Pennsylvania 
Dutch territory, or the substitution within the last several 
years of arrival draft terms on carload shipments of flour 
into intermountain territory in place of the former terms 
of 30 to 90 days on open account. 

The Movement to Standardize Terms. — A factor of pri- 
mary importance in the movement to shorten terms is to 
have all, or at least the larger part of the firms, in a given 
industry or territory adopt a uniform procedure. In some 
industries, a certain set of terms gradually comes to be 
recognized as regular, and is employed by a majority of 
the firms in the industry. In other lines, however, stand- 
ardization is accomplished through the trade association 
in the industry, which will be either national in scope, or 
else confined to a given territory, according to the industry 
in question. In rare cases, such as for Huntington, West 
Virginia, wholesalers in 1914, all firms in a given territory 
may arrange to have uniform terms. In most instances, 
however, the group which considers the question is confined 
to one industry only, and, in fact, cases are found, such as 
for the Utah-Idaho Wholesale Grocers Association, where 
terms agreed upon have been discontinued in view of the 
variety of items which the individual house handles, and 



102 THE MECHANISM OF COMMERCIAL CREDIT 

the matter accordingly left entirely to each house inde- 
pendently. Terms are generally agreed upon by those 
who sell to retailers, and are found much more largely in 
the case of wholesalers than of manufacturers. As indi- 
cated above, the manufacturer usually has far less interest 
in terms. In some instances, however, terms may be part 
of standard contracts which are drawn up covering the sale 
of various articles, or of rules governing trading or dealing 
therein. This is true of canners' sales of fruits and veg- 
etables, and of sales of various agricultural products, such 
as California raisins and beans, as well as of open market 
transactions in commodities like wheat or petroleum, and of 
sales of raw and manufactured silk. 

In no case, however, are the terms formally adopted. 
They are merely recommended for the use of the member- 
ship, and each member is free to do as he sees fit. 
Accordingly, the terms recommended are of two classes. 
Certain terms are actually employed by the majority of the 
firms in the industry. The figures of outstandings already 
given for wholesale grocers indicate considerable adherence 
to the standard of 1 per cent 10 days, net 30 days found 
in the terms of the various associations in that industry. 
On the other hand, in some lines the terms represent an 
ideal, and are recommended for what may be termed their 
moral effect. The National Wholesale Lumber Dealers' 
Association in 1917, for example, reaffirmed the terms it 
had recommended in 1902. This was done in spite of the 
fact that there had gradually come about widespread 
deviation from them, and in the discussion at the conven- 
tion one of the principal arguments advanced for their 
retention was that the ideal which they represented should 
not be lost sight of. The same general situation exists in 
the case of the terms prepared by certain retailers ' associa- 
tions, although it is not true of the buying terms which 
various wholesalers' associations have formulated. The 



RELATION TO BUSINESS CONDITIONS 103 

National Association of Hardware Retailers and several 
retail lumber dealers' associations in various sections, for 
example, have adopted order blanks or resolutions calling 
for deduction of the cash discount on arrival of the mer- 
chandise, and commencement of the net period from that 
time. These terms represent merely their desires, and, at 
least in the case of hardware, are employed only for a small 
minority of their purchases. 

Regular terms have been found in many industries for 
years, and terms have been formally recommended in 
others. Various instances of the latter are recorded in 
the 90 's. The greatest impetus, however, was given after 
1910, and a movement in this direction was specially marked 
during the war period. The movement parallels the grow- 
ing recognition of the distinctive character of the credit 
problems which confront the business house, and the fact 
that competition should be confined to the price and mer- 
chandising aspects. The movement of course was aided 
by the special conditions which obtained during the war 
period. 

Wholesalers' Interest in Terms. — In the movement for 
standardization of terms, the wholesaler has been a leading 
factor. This is true, however, only of the so-called 
"regular" wholesaler. The trading jobber who does not 
provide a regular link in the distributive chain between 
manufacturer and retailer pays little attention to terms. 
Similarly with those wholesalers who actually serve rather 
as agents of manufacturers than as totally independent 
entities themselves. Machine tool dealers, for example, in 
general have few of the characteristics of regular jobbers. 
They work very closely with their principals, the manu- 
facturers, and often carry only a few samples, instead of 
a large stock from which they can make immediate delivery. 
Hence they do not have the same interest in the terms on 
which they buy as do, say, wholesalers of hardware. In 



104 THE MECHANISM OF COMMERCIAL CREDIT 

fact, the regular wholesaler has a distinctive series of 
problems with respect to terms, and the terms which he 
employs will therefore be considered as a unit. These 
problems have been perhaps most thoroughly considered 
and fully worked out in the grocery and hardware lines. 
The discussion accordingly will be confined largely to, and 
the illustrations drawn from them, although the principles 
are equally applicable to other branches of wholesale trade. 
The wholesaler considers both the terms upon which he 
buys and the terms upon which he sells. In those lines in 
which selling terms have been recommended, a special com- 
mittee of the trade association is usually charged with their 
formulation, and reports annually to the convention. 
Frequently its activities may also embrace other phases of 
credit work, such as promptness of collections, respecting 
the discount period by retailers, etc. From 1908-1910 
the National Wholesale Grocers' Association considered the 
question of terms of sale on a national basis, but after 1910 
left the matter entirely to the judgment of the individual 
house. It is difficult, of course, in view of the wide variety 
of items handled in this and many other jobbing lines, and 
the considerable differences between the business of the 
individual houses, as well as the great expanse of the 
country, to lay down any uniform terms applicable under 
any and all conditions. However, since 1910 at least 12 
state and territorial associations in the grocery line have 
recommended terms to their membership, and seem to have 
met with considerable success. The differences in terms 
between the several associations relate largely to the terms 
on certain individual items in the classifications which they 
prepare, so that in the line as a whole regular terms may be 
said to be 1 per cent 10 days, net 30 days. The formal 
recommendation of terms has been supplemented in most 
cases by the preparation of monthly reports of outstandings 
of the kind referred to above. 



RELATION TO BUSINESS CONDITIONS 105 

In the case of some other leading wholesale lines, little 
consideration is given to the classification of individual 
items, but attention is concentrated rather upon the general 
terms. Where this is done, the problem is simplified 
greatly, at least as far as the preparation of formal terms 
is concerned. Accordingly, too, it is possible to prepare 
terms for use on a national scale, and this has always been 
done, for example, by the National Hardware Association. 
In that industry, however, territorial terms have also been 
recommended by the southern and Texas associations. In 
other lines practice differs. The Southern Wholesale Dry 
Goods Association has recommended terms applicable to its 
section, but the National Wholesale Dry Goods Association, 
whose membership is confined more largely to the north, 
has never formally recommended terms. It has, however, 
had its secretary compile the terms in use by the member- 
ship, and the same is true of other bodies, such as the 
National Wholesale Jewelers' Association. 

Characteristic only of wholesalers as contrasted with 
manufacturers, is activity with respect to the terms upon 
which merchandise is purchased, in particular the discounts 
allowed. The leading associations have had committees 
for many years whose primary interest is in this matter. 
The committee of the National Wholesale Grocers' Associa- 
tion dates back to 1907, the year after the association was 
founded. The officers of the National Hardware Associa- 
tion for many years gave attention to the subject, and the 
importance of the question at one time in the 90 's was 
indicated above. Since about 1910, special committees of 
the association have been appointed as occasion has de- 
manded. The several divisions of the National Wholesale 
Dry Goods Association have regularly communicated with 
manufacturers whose discounts were unsatisfactory, while 
for several years the Southern Wholesale Dry Goods Asso- 
ciation had a regular committee to deal with the matter 



106 THE MECHANISM OF COMMERCIAL CREDIT 

and to seek to obtain uniform terms on all items which the 
members purchased. On the other hand, in the boot and 
shoe industry, where the manufacturers distribute about 
40 per cent of the output direct to retailers, in part through 
their own jobbing houses, and where certain of them also 
distribute goods from other factories as well as their own, 
activity with respect to buying terms has been confined 
largely to rubber and tennis footwear, which is produced 
by different manufacturers. 

A good idea of the scope of the activities of such bodies 
along these lines is afforded by the National Wholesale 
Grocers' Association. In 1915 the chairman of the associa- 
tion's Discount for Cash Committee stated that the subject 
of increased discount for cash had been submitted to every 
known firm or corporation soliciting the wholesale grocery 
trade. Not only have the association's activities covered a 
wide field, but they have included smaller as well as greater 
changes in discounts. To take a couple of illustrations at 
random, as a result of their activities, sugar refiners in 
1911, in general, increased their discount from 1 per cent 
to 2 per cent, while in 1919 the rice contract called for a 
1 per cent discount in place of the 1/2 per cent previously 
allowed. In the course of its work, the Discount for Cash 
Committee has at various times also called attention to the 
need for members to respect the cash discount period. 

Buying and Selling Terms of Wholesalers. — But why 
all this interest on the part of the wholesaler in terms? 
The answer is not far to seek. On the one hand, it relates 
to the question of pricing his goods for resale ; on the other 
hand, to the question of the profits which he receives. 

The point of primary importance with respect to the 
terms upon which he purchases is the size of the cash dis- 
count which he receives. While the net terms to the retailer 
are based on the retailer's marketing period, and a large 
part of the retailers take the full net terms, the wholesaler 



RELATION TO BUSINESS CONDITIONS 107 

is presumed to bear the financing burden himself, and to 
pay cash for his merchandise. At the same time that he 
thus discounts his bills, he grants time to the retailer to 
whom he sells. The length of the net terms which he grants 
depends upon the size of the cash discount which he 
receives. This is not true in the sense that he disposes of 
the goods as soon as sold, so that, say, a 2 per cent discount 
which he receives corresponds to the net 60 days which the 
buyer receives, because he actually carries the merchandise 
himself for some time. It means rather that when he dpes 
this he can fix the price to the retailer on the basis of the 
net price which he himself is quoted. This was definitely 
assigned as a partial reason for the hardware wholesalers' 
opposition to the decrease in the discount on bolts and nuts 
from 2 per cent to 1 per cent. 

The above discussion assumes that buying and selling 
terms are the same. This is not, however, by any means 
universally conceded, and there is a great mass of contro- 
versy about the relation between the two. But at least one 
point of agreement exists. A cardinal principle, it is held, 
is that the discount allowed on sales should never be greater 
than the discount which is received on purchases. Further 
than this, however, there are two theories. One is that the 
discounts in the two cases should be equal. This theory is 
held in various lines, such as hardware. On the other hand, 
in certain lines a greater discount is desired on purchases 
than is received on sales. Take the grocery business, for 
instance. The National Wholesale Grocers' Association 
desires to obtain a 2 per cent discount, although standard 
selling terms are 1 per cent 10 days, net 30 days. Approxi- 
mately 50 per cent of retail grocers discount their bills, 
and accordingly there is a differential of 1 1/2 per cent 
accruing to the wholesaler. One-half per cent of this 
presumably offsets the credit work and credit risk and the 
interest involved in carrying the accounts which do not 



108 THE MECHANISM OF COMMERCIAL CREDIT 

discount, leaving a profit of 1 per cent. It is generally 
held that firms in the grocery line which do not take ad- 
vantage of the cash discount are not in position to make 
a net return on the funds invested. On the other hand, 
it should be noted that certain wholesale grocers believe 
that the average discounts received are only about 1 1/2 
per cent and that the average discounts granted are about 
the same. In the hardware industry, where the theory of 
equalization obtains, a differential (over 1 per cent, as only 
40 to 50 per cent of the accounts are discounted) 5 is like- 
wise obtained but this should theoretically be entirely offset 
by the credit risk and credit work, as well as the interest 
involved in carrying those accounts which do not discount. 

Intimately related to the question just considered, is the 
question of the relation which the amount of the discount 
received by the wholesaler bears to the net profits which he 
makes. It is often stated that the amount of the discount 
equals the net profits of the wholesaler, or at least a con- 
siderable part of them. 6 In some cases, perhaps, over- 
emphasis has been placed on the importance of the discount 
in this connection, though it is true that the wholesaler 
necessarily works upon a narrow margin of profit. Where 
the size of the discount from the manufacturer is increased, 
say, 1/2 per cent, wholesalers are generally urged not to 
push competition so far as to pass the discount on to the 
retailers, but instead to add it to their own profits. Little 
exact information as to the amount of the margin of net 

6 Some information as to the promptness with which hardware 
retailers pay their bills is contained in an address advocating the 
use of the trade acceptance, read by Mr. K. H. Treman at the 1916 
Convention of the National Hardware Association and reproduced 
in the pamphlet entitled ' ' Trade Acceptances, ' ' What They Are and 
How They Are Used," prepared for the. American Acceptance Coun- 
cil, and published October 1, 1919, 

8 See an address of Mr. Geo. E. Lichty on <( Discount for Cash; 
Why is it to Manufacturers' Best Interest,'' before the National 
Wholesale G-rocers' Association, 1916, Proceedings, pp. 192-196. 



* RELATION TO BUSINESS CONDITIONS 101? 

profit is available, but in the hardware industry in 1919, 
for example, it was stated that the amount in that industry 
was usually estimated at 2 1/2 to 3 1/2 per cent of net 
sales, and was higher during the war, although for a longer 
period of years it averaged well under 2 per cent. 



PART II 
THE TRADE ACCEPTANCE QUESTION 



CHAPTER VII 

THE TRADE ACCEPTANCE MOVEMENT IN THE UNITED STATES 

Part II has as its central purpose a critical study of 
the suggestions which have been made for reforming the 
commercial credit system of the United States by advocates 
of the trade acceptance. This involves a consideration of 
the elements of strength and weakness in both systems, and 
raises a host of questions. Before drawing a contrast be- 
tween the two systems, and considering the desirability of 
each, however, it will be desirable to obtain a more complete 
and unified view of the status and extent of use of the trade 
acceptance than has been afforded by the previous dis- 
cussion. It will likewise be desirable to consider the growth 
of the instrument since its inception, as this will also throw 
considerable light upon the questions of principle which 
will be considered later. The present chapter will therefore 
be devoted to a consideration of the trade acceptance 
movement, and will be followed by a chapter giving the 
results of the surveys which have been made of the use of 
the trade acceptance. 

Meaning of tlie Trade Acceptance. — The trade accept- 
ance has been variously defined. Among the best definitions 
is. that of Mr. R. H. Treman, as follows: 1 

A trade acceptance is a time draft drawn by the seller of mer- 
chandise on the buyer for the purchase price of the goods and 
accepted by the buyer, payable on a certain date, at a certain 
place designated on its face. 



1 ' ' Trade Acceptances, What They Are and How They Are Used, ' ' 
published by the American Acceptance Council, October 1, 1919. 

113 



114 THE MECHANISM OF COMMERCIAL CREDIT 

A shorter, but substantially similar definition, stressing 
the point of view of the buyer-acceptor, is stated by Mr. 
Oliver J. Sands, as follows : 2 

An acceptance is an acknowledgment of the receipt of goods s 
and a promise to pay for the same at a fixed date and place. 

Both of these definitions, it will be observed, include the 
same general features, which serve to distinguish the trade 
acceptance from other kinds of paper. Fundamentally it 
is an order to pay which is accepted by the drawee. This 
feature serves to give the paper its distinctive form. Sup- 
plementary to this, but no less essential, is the fact that it 
arises out of a specific merchandise transaction or series of 
transactions, and that this fact, although not the details, 
is indicated on its face. This serves to make the paper a 
trade acceptance, instead of merely an acceptance. These 
two features mark the difference between the trade accep- 
tance and the ordinary promissory note, which is merely a 
promise to pay, and totally unrelated to any specific 
transactions, giving no inkling of the purpose for which 
the credit is extended. Added to these two features are 
others which serve to establish the negotiable character of 
the instrument, etc. 

Various forms of trade acceptance have been devised by 
different agencies and organizations, and are now in use. 
Among the most widespread are those of the American 
Trade Acceptance Council (later the American Acceptance 
Council) and the National Association of Credit Men. 

The Trade Acceptance Before and After the Civil War. 
— The trade acceptance is by no means a recent innovation. 
It was already in considerable use, and, together with the 
promissory note, formed the basis of the commercial credit 
system prior to the Civil War. This conflict marked the 

a Presented at the meeting of the American Trade Acceptance 
Council at New York on November 23, 1917. 
a By implication only. 



TRADE ACCEPTANCE MOVEMENT IN U. S. 115 

beginning of a revolution in credit practice. The excessive 
issues of greenbacks helped to make uncertain the value 
of credit instruments which ran for any considerable length 
of time, while the market for merchandise widened, and 
changed from a primarily local one to one on a more 
national scale. Sellers, therefore, endeavored to bring busi- 
ness as nearly as possible to a cash basis, and were aided 
by the fact that the demand for goods tended to outrun the 
supply. In the 80 's there developed the practice of selling 
goods by sample, instead of by personal selection from an 
accumulated stock. As a result, the doctrine of "implied 
warranties," as it has been termed, arose, and the risk 
and responsibility of delivery was laid upon the seller. This 
led to the use of the open account, which, in turn, led sellers 
to offer cash discounts in order to stimulate payment. 
Gradually, the cash-discount open-account system, as we 
know it to-day, grew up and was extended to cover almost 
all parts of the commercial credit field. 

The Trade Acceptance and the Federal Reserve Act. — 
The history of the recent trade acceptance movement in 
the United States falls naturally into 3 stages: (1) a 
period of gradual progress, from the passage of the Federal 
Reserve Act until the autumn of 1917; (2) a war period 
in which an active campaign was carried on to extend the 
use of the acceptance, under the auspices of a special 
organization, the American Trade Acceptance Council, 
formed at the opening of the period; and (3) a post-war 
period, dating from about the end of 1919, at the opening 
of which friends and foes alike called attention to abuses 
in trade acceptance practice by some users of the in- 
strument, and during which the American Acceptance 
Council (successor to the American Trade Acceptance 
Council) shifted its chief attention to the bankers' accept- 
ance. 

Just as the inauguration of the National Banking System 



116 THE MECHANISM OF COMMERCIAL CREDIT 

during the Civil War marked the beginning of a new epoch 
in American banking, so the passage of the Federal Reserve 
Act also marked the begining of another epoch. The Act, 
too, contained certain provisions which were highly signifi- 
cant from a credit point of view. Among these, none is 
more important for the present question than the require- 
ments which the Federal Reserve System lays down as to 
paper which it will accept for rediscount or purchase — 
in other words, its definition of "eligible" paper. This 
definition obviously will largely determine the type of 
paper which is created, because business men will create 
just such paper in order that it may possess the rediscount 
privilege. The definition might therefore profoundly in- 
fluence American mercantile credit practice if attempt 
were made to introduce innovations into the existing sys- 
tem. This question, Willis tells us, 4 was specifically 
considered when the Act was being framed, and a proposal 
was made to confine the eligible and discountable paper to 
that which bore two names, those of buyer and seller, but 
this plan was rejected. The Act itself is not specific, but 
after admitting promissory notes as well as drafts, gives 
the Federal Reserve Board wide latitude in prescribing 
precisely what paper is eligible. Section 13 of the Federal 
Reserve Act reads in part as follows: 

. . . Any Federal Reserve bank may discount notes, drafts, andi 
bills of exchange arising out of actual commercial transactions; 
that is, notes, drafts and bills of exchange issued or drawn for 
agricultural, industrial, or commercial purposes, or the proceeds: 
of which have been used, or are to be used, for such purposes, the 
Federal Reserve Board to have the right to determine or define 
the character of the paper thus eligible for discount, within the 
meaning of this act. 

This applies to paper which a Federal Reserve Bank may 
rediscount for its member banks. Supplementary to this 
*T7ie Federal Reserve (New York, 1915), p. 186. 



TRADE ACCEPTANCE MOVEMENT IN U. S. 117 

is Section 14, which in part refers to paper which a Fed- 
eral Reserve Bank may purchase in the open market, as 
follows : 

Any Federal Reserve bank may, under rules and regulations 
prescribed by the Federal Reserve Board, purchase and sell in the 
open market, at home or abroad, either from or to domestic or 
foreign banks, firms, corporations or individuals, . . . bills of 
exchange of the kinds and maturities by this act made eligible 
for rediscount, with or without the endorsement of a member 
bank. 

It is thus evident that bills of exchange, or trade accept- 
ances, have a wider access to the Federal Reserve Banks 
than do notes, as the latter may merely be rediscounted 
and are not eligible for purchase in the open market. Al- 
though the Act as originally framed included notes, and 
thus placed open market transactions upon the same basis 
as discount transactions, this provision was specifically 
omitted after due consideration. 5 It was held that the 
purchase of such single name paper might expose the Fed- 
eral Reserve Banks to some hazard, for they would not be in 
as good a position to judge the paper as the member banks 
themselves, and therefore might from time to time take 
paper which was not thoroughly satisfactory. While the 
paper would be protected by the endorsement of a member 
bank in the case of a discount, this would not be required 
in an open market transaction, and hence this protection 
would be lacking. 

Work of the Federal Reserve Board. — In accordance 
with the provisions of sections 13 and 14, the Federal 
Reserve Board proceeded in due course to prepare and 
issue a regulation defining the character of paper eligible. 
In February, 1914, the Reserve Bank Organization Com- 
mittee requested various clearing houses, chambers of 
commerce and other associations to submit definitions of 

5 Willis, p. 184. 



118 THE MECHANISM OF COMMERCIAL CREDIT 

"commercial paper." 6 The replies received were exceed- 
ingly diverse. While some bodies, such as the New York 
Clearing House Association, favored two name paper, 
others, such as the Merchants Association of New York, 
urged that single name paper be accepted for rediscount. 
The Board accordingly declared in Circular No. 13, dated 
November 10, 1914 (as well as previously in Circular No. 
8, dated October 17, 1914) that "it would be inadvisable 
at this time to issue regulations placing a narrow or re- 
stricted interpretation upon the section denning the 
character of paper eligible for discount," and decided 
"to admit both forms to rediscount with the Federal Re- 
serve Banks." 

Whereas under this circular both classes of paper were 
admitted to rediscount at Federal Reserve Banks without 
distinguishing between them, the following year a separate 
class of trade acceptance was recognized, and a special 
regulation (P, Series of 1915, dated July 15, 1915) was 
issued governing its rediscount. Circular No. 16, Series 
of 1915, which accompanied the regulation, employed the 
term "trade acceptances," and explained that it was to 
deal with them as a distinct class of commercial paper, 

for which the Board is ready to approve the establishment of a 
discount rate somewhat lower than that applicable to other com- 
mercial paper. ... In promulgating it, the Board expresses 
the belief that it will considerably enlarge the scope of service 
of Federal Reserve Banks, and, incidentally, assist in developing 
a class of double-name paper, which has shown itself in so 
many countries a desirable form of investment and an important 
factor in modern commercial banking systems. 

In accordance therewith, separate rates for trade accep- 
tances were inaugurated at the several Federal Reserve 
Banks, commencing with the Federal Reserve Bank of New 

6 E. E. Agger, ' ' The Commercial Paper Debate, ' ' Journal of Po- 
litical Economy, Vol. 22, 1914. O. M. W. Sprague, " Commercial 
Paper and the Federal Eeserve Banks," ibid., contains an excellent 
discussion of principles. 



TRADE ACCEPTANCE MOVEMENT IN U. S. 119 

York on July 22. The Chicago and Minneapolis banks, 
however, had made no distinction by January 1, 1916, and 
the same rates remained in force in these districts as had 
been inaugurated for all classes of paper in November, 1914. 
These two banks only inaugurated special rates in Novem- 
ber and March, 1916, respectively. The rates established 
on trade acceptances generally were from 1/2 to 1 per cent 
below those on regular paper, and thus gave them a 
preferential rate. When war financing commenced in 1917, 
the rates on trade acceptances in some districts were the 
same as on paper secured by Government war obligations. 
At the middle of 1917 'this was the case with 6 of the 12 
banks, but on January 1, 1918, it was true of only 3 banks. 

Efforts were actively made by the Board and the Federal 
Reserve Banks to further the use of the trade acceptance. 
Several of the Board members, as well as the secretary, 
addressed trade associations and other bodies of business 
men and pointed out the advantages which, it was believed, 
would accrue from the introduction of the new instru- 
ment. 7 Several of the members of the board, notably Mr. 
P. M. Warburg, were strong advocates of it, as were also 
certain of the leading officers of some of the individual 
Federal Reserve Banks, notably Mr. D. C. Wills, Federal 
Reserve Agent at Cleveland, and Mr. R. H. Treman, Deputy 
Governor of the Federal Reserve Bank of New York. 8 A 
committee of Federal Reserve Agents, consisting of Messrs. 
Wills, Curtiss (Boston), Jay (New York) and Ramsey 
(Dallas) reported to a conference of Federal Reserve 
Agents held in December, 1916, that the development of 
the trade acceptance plan "should be part of any general 
publicity scheme, if such action should be taken by the 



T For example, address of H. Parker Willis before the Second 
National Silk Convention at Paterson, N. J., November 22, 1916. 

8 In addition to Mr. Treman 's other writings, reference should be 
made to his pamphlet entitled "Trade Acceptances" (August, 1917). 



120 THE MECHANISM OF COMMERCIAL CREDIT 

conference and approved by the Board,' ' but this was not 
done. The committee also recommended that each Federal 
Reserve Bank secure standard trade acceptance forms and 
supply them to member banks, accompanied by a circular 
explaining their advantages, and this step was taken by 
some of the banks. 9 

The Trade Acceptance Movement — The National Asso- 
ciation of Credit Men. — During what has been termed 
above the first period of trade acceptance history, the 
movement, however, centered around the activities of the 
National Association of Credit Men. Certain of its officers 
had from the outset displayed an active interest in the 
acceptance, and had already urged Congress at the time 
the Federal Reserve Act was being framed, to give prefer- 
ence to the accepted draft. The Association for some years 
has adopted resolutions at its annual conventions endorsing 
the trade acceptance and favoring its wide use. It further- 
more early adopted the policy of actively bringing the 
acceptance to the attention of business houses and of 
endeavoring to enlarge the circle of users. At the close 
of 1915, it was officially stated that the Association had 
instituted "a campaign with a view to persuading the 
business interests of the country to use the trade acceptance 
in place of open book accounts." In framing its plan, 
it consulted with various authorities, such as the vice- 
chairman of the Federal Trade Commission and the secre- 
tary of the Federal Reserve Board, and asked the Federal 
Reserve Bank of New York to recommend a form of trade 
acceptance. In addition to considering the acceptance at 
its own annual conventions, the Association held a number 

9 " What are the advantages of trade acceptances? To the seller? 
To the purchaser? To the banker?' ' Federal Eeserve Bank of 
Minneapolis, January, 1917. 

John U. Calkins, Deputy Governor, Federal Eeserve Bank of San 
Francisco, address at a meeting of Tacoma Credit Men 's Association, 
June 2, 1916. 



TRADE ACCEPTANCE MOVEMENT IN U. S. 121 

of special conferences devoted exclusively to the instrument, 
such as in New York, March 9, 1917, and held several in 
cooperation with other more or less closely related bodies, 
such as at Buffalo, March 11, 1918. The monthly Bulletin 
of the Association (succeeded April, 1920, by the Credit 
Monthly), regularly contained items of interest, frequently 
giving the experience of firms which had used the accept- 
ance, and often grouping such items under some distinctive 
heading, such as Trade Acceptance Brevities or Trade 
Acceptance Department. Officials of the Association ad- 
dressed trade associations and other bodies of business 
men, while literature was prepared and distributed. In 
March, 1917, a Trade Acceptance Bureau was installed in 
the national offices of the Association at New York, whose 
particular function it was to prepare and distribute litera- 
ture relative to the instrument, and serve as a source of 
information concerning it. It was active along these lines 
until the Spring of 1919, when the American Acceptance 
Council was created. 

During the early years appeals to the business man to 
use the trade acceptance were based upon the superior 
advantages which it was claimed the instrument possessed. 
With the advent of the war, this was re-enforced by an 
appeal to patriotism. The resolutions adopted at the 1918 
convention emphasized the service which it was believed 
the acceptance might render during such a period of 
stress : 

Resolved, That the National Association of Credit Men, in con- 
vention assembled, records again its firm belief in the Trade 
Acceptance, as a credit instrument superior to the open book 
account in utility, protection and value, and furnishing the basis 
of a more liquid and flexible medium of exchange in mercantile 
transactions; furthermore, releasing capital that could be utilized 
to advantage in normal time and that may become pressing neces- 
sity under war conditions, when the credit functions of the nation 
will receive their severest test; nothing should be left undone or 



122 THE MECHANISM OF COMMERCIAL CREDIT 

neglected that may contribute to the nation's powers for the win- 
ning of a victory in the struggle for world independence, and the 
trade acceptance is clearly an instrument that will help to that end. 

Whereas, it is of the utmost importance at this critical junc- 
tion in our financial affairs that we make full use of every legiti- 
mate credit instrument, and 

Whereas, in the inevitable expansion of credit incident to the 
growing demands of war, it is of the utmost importance that we 
create not only credit instruments that are eligible for rediscount 
at Federal Reserve Banks, but instruments of the widest market- 
ability, qualities which, as leading financial authorities state, are 
present in the highest degree in acceptances : 

Be it Resolved, That the National Association of Credit Men 
continue to extend its powers to bring about a better understand- 
ing of the trade acceptance and to advise, so far as may be, its 
use in the various lines of trade as contemplated in the Federal 
Reserve Act, as interpreted by the Federal Reserve Board. 



The American Trade Acceptance Council. — With the 
advent of the war, the acceptance movement entered upon 
a second stage, during which a campaign, more active and 
more highly organized than previously, was carried on to 
extend its use. The initial step was taken at the War 
Convention of American Business held in Atlantic City, 
September 17-21, 1917, under the joint auspices of the 
Chamber of Commerce of the United States, the American 
Bankers' Association and the National Association of 
Credit Men. The acceptance was discussed at the con- 
vention and a joint committee on trade acceptances was 
appointed, consisting of three members from each associa- 
tion, to ''consider the development of the trade acceptance 
as a device for strengthening and mobilizing commercial 
credit, and to serve as a permanent center for the direction 
of a nation-wide educational campaign in the interest of 
the Trade Acceptance." At a subsequent meeting in New 
York on October 9th, a permanent organization was ef- 



TRADE ACCEPTANCE MOVEMENT IN U. S. 123 

fected, which was to be known as the American Trade 
Acceptance Council. The following were the principal 
officers: Mr. Lewis E. Pierson, Chairman of the Board, 
Irving National Bank, New York, Chairman; Mr. R. H. 
Treman, Deputy Governor, Federal Reserve Bank of New 
York, Vice-Chairman ; Mr. J. H. Tregoe, Secretary-Treas- 
urer, National Association of Credit Men, Secretary; and 
Mr. W. W. Orr, Assistant Secretary-Treasurer of the 
Association, Assistant Secretary. Mr. Jerome Thralls, sec- 
retary of the clearing house and later of the national bank 
sections of the American Bankers' Association, was shortly 
also appointed Assistant Secretary. Several committees 
were appointed, and regular offices opened in the Wool- 
worth Building, New York. Somewhat later the Council 
was enlarged to include representatives from the National 
Association of Manufacturers. 

On the whole, the work of the American Trade Accept- 
ance Council represented an intensive effort along the lines 
already laid out by the National Association of Credit 
Men. 10 The Council became the center of the movement. 
It developed standard trade acceptance forms, which were 
approved by the Federal Reserve Board, the General 
Counsel of the American Bankers' Association and other 
authorities. It held frequent meetings, the New York 
members gathering weekly. It held a regular annual con- 
vention at Chicago on June 17, 1918, the day before the 
convention of the National Association of Credit Men, after 
having held several conferences at New York and Phila- 
delphia. It was said that over 800 were in attendance at 
the Chicago Convention and no less than 600 were in the 
room at any one time. In perfecting its organization, state 
trade acceptance councils or committees were formed in 

10 The Keport of the Trade Acceptance Committee of the American 
Bankers' Association at the 1918 convention described fully the work 
of the Council. 



124 THE MECHANISM OF COMMERCIAL CREDIT 

various states, for example, Michigan in March, 1918, and 
Maryland in April, 1918, and local councils were formed 
in various centers, being in operation by the fall of 1918 
at least in Rochester, Milwaukee and Indianapolis. The 
Council had a speakers' bureau, which was active in 
addressing trade organizations and other bodies with a view 
to having them endorse the trade acceptance, and regular 
sets of resolutions were prepared at the close of 1917, for 
the use of these associations. The council undertook to 
furnish material to its committees, to financial and trade 
periodicals and to the general press. In addition, it pub- 
lished a series of pamphlets, 11 and Mr. Thralls issued weekly 
from the American Bankers' Association offices a Trade 
Acceptance Service Bulletin which was distributed to not 
only 700 banker committeemen, but, in addition, to 1,000 
others representing various lines of business and the press. 
It also engaged in several other allied lines of work, such 
as advocating that savings bank investment laws be 
amended so as to permit the purchase of prime trade 
acceptances, and meeting with a committee which consid- 
ered the use of acceptances in cotton financing at New York 
in the Spring of 1918. 

Work of the Bankers. — By means of the American Trade 
Acceptance Council, the advocates of the trade acceptance 
succeeded in enlisting the aid not only of the Chamber of 
Commerce, but also of the American Bankers' Association. 
While several bankers, notably Mr. C. W. Dupuis of Cin- 
cinnati and Mr. George Woodruff of Joliet, Illinois, in 
addition to those already mentioned, had been enthusiastic 
advocates of the trade acceptance, and a number of banks, 
particularly in the larger centers, such as New York, had 

"These include: 

" Trade Acceptances, What They Are and How They Are Used," 
by Bobert H. Treman. 
"Trade Acceptance Catechism," by J. T. Holdsworth. 



TRADE ACCEPTANCE MOVEMENT IN U. S. 125 

prepared and distributed pamphlets explaining its use, 12 
the bankers on the whole had held back. When the question 
was first considered, Mr. James B. Forgan, president and 
later chairman of the First National Bank of Chicago, had 
been a strong upholder of the prevailing cash discount- 
open account system as opposed to the trade acceptance, 
as was also the late Mr. James G. Cannon, president of 
the Fourth National Bank of New York. Mr. W. W. 
Orr in 1917 wrote as follows: 

We have met with much difficulty in the attitude of some banks, 
particularly those in smaller centers, some of them indifferent and 
without information as to the acceptance and its advantages for 
them (the banks), over the ordinary promissory note, and others 
definitely opposed to the new system. 

Mr. Beverly D. Harris, quoting Mr. Orr at the American 
Bankers' Association Convention in 1917, stated that this 
was borne out by his own experience, adding : 

I have a very strong conviction that there is a great deal of 
confusion of thought, indifference, apathy, lack of information 
and lack of conviction among bankers in general, and that at best 
very lukewarm support is being given. 

As already noted, the American Bankers' Association 
at its 1917 convention appointed a trade acceptance com- 
mittee which co-operated in the formation of the American 
Trade Acceptance Council. Mr. Thralls took charge of 
the publicity work among the banking community. An 
organization was developed. Three bankers were appointed 
by the state bankers' association in each state, and in 
many cases committees were also appointed for groups 
or other subdivisions of these associations, and chairmen 

"See the National City Bank of New York's reprints of several 
addresses by Mr. B. D. Harris, and the Irving National Bank of 
New York's series of pamphlets, largely reprints of addresses by Mr. 
Pierson, as well as the individual pamphlets on Trade Acceptances 
of many of the leading banks. 



126 THE MECHANISM OF COMMERCIAL CREDIT 

for counties. The president of the American Institute of 
Banking upon request appointed a committee of three or 
more junior officers in each Federal Reserve bank and 
branch city, to which detail problems could be submitted 
for consideration and report. By December, 1917, 22 
associations had already appointed trade acceptance com- 
mittees and had agreed to furnish 150 speakers, while by 
April, 1918, there were committees in every state, as well 
as in all Federal Reserve bank and branch centers, and 
there was a special American Institute of Banking Commit- 
tee of three members. An effort was made to put the 
subject on the program at the annual conventions of the 
State bankers' associations. In May, 1918, it was stated 
that this had been done in the case of 29 associations which 
were to hold conventions, while it was later reported that 
34 associations had adopted resolutions in favor of the 
trade acceptance by the fall of that year. The mechanism 
thus created had the further advantage of providing expert 
advice on two technical questions which were of impor- 
tance: (1) provision for the most economical and efficient 
method of handling acceptances in banks and business 
houses and (2) evolution of a satisfactory schedule of 
service, exchange and collection charges. The monthly 
Journal of the Association also frequently carried items 
on the trade acceptance, and the association's committee 
on acceptances was charged with preparing some literature. 
The American Acceptance Council.— In December, 1918, 
plans were made to reorganize the American Trade Ac- 
ceptance Council. At a meeting in New York on January 
21, 1919, which was attended by over 250 leading bankers 
and business men from all parts of the country, the reor- 
ganization was effected and the Council became the 
American Acceptance Council. According to its President, 
the purpose was to broaden the scope and character of 
the work, and identify it with a large percentage of the 



TRADE ACCEPTANCE MOVEMENT IN U. S. 127 

business and financial interests of the country, instead of 
confining it to the relatively small group which had spon- 
sored and financed the initial movement. To the program 
of the American Trade Acceptance Council was added the 
bankers' acceptance and the extension of acceptances into 
the foreign as well as the domestic field. At the outset, it 
had 111 active members. This figure had increased by 
December 4, 1919, to about 200 (exclusive of 16 service 
members), and by October 1, 1921, to 243 (exclusive of 
43 service members). Its appeal has been, however, pri- 
marily to the banking community, for of the 200, only 14 
were associations and only 58 were commercial houses, and 
of the 243, only 9 were trade and bankers' associations 
and only 27 were commercial concerns, the remainder being 
either banks, trust companies or private bankers. The first 
set of officers was as follows: Mr. Warburg, Chairman of 
the Executive Committee; Mr. Pierson, President; Mr. 
Arthur Reynolds, Vice-President of the Continental and 
Commercial National Bank of Chicago, Vice-President ; Mr. 
Thralls, Secretary; Mr. Percy H. Johnston, President of 
the Chemical National Bank of New York, Treasurer ; and 
Mr. R. H. Bean, Executive Secretary. These officers have 
changed somewhat from year to year, and Mr. Warburg 
is now President; Mr. E. C. Wagner, Vice-President of the 
Discount Corporation of New York, Chairman of the 
Executive Committee; Mr. Fred I. Kent, Vice-President 
of the Bankers' Trust Company, of New York, Vice-Presi- 
dent; Mr. Johnston, Treasurer; and Mr. Bean, Secretary. 

It will be observed that the Council was organized along 
the same general lines as its predecessor, and its methods 
were also similar. It held a regular annual convention at 
Detroit on June 9, 1919, the day preceding the convention 
of the National Association of Credit Men, and has since 
held annual meetings of the Board of Representatives at 
the opening of December, 1920 and 1921. At each meeting, 



428 THE MECHANISM OF COMMERCIAL CREDIT 

the trade acceptance has been considered to some extent. 
The Council has prepared a regular series of pamphlets 
on both bankers and trade acceptances, 13 and since Janu- 
ary, 1920, has published an Acceptance Bulletin monthly. 
By October 20, 1921, it had distributed 400,000 pieces of 
literature on the trade acceptance and had engaged in 
correspondence with business houses and associations, 
furnishing them with information as to the use of the 
instrument and the proper methods to be followed in in- 
troducing the system. It has also had a regular speakers' 
bureau. By March, 1919, three local associations had been 
organized at Baltimore, Joliet and Rochester, and the fol- 
lowing month plans were well under way for similar 
associations in Cleveland, Cincinnati and Newark. In 
October, 1921, it was stated that the Council practically 
had a branch in Cleveland, in the form of the Cleveland 
Bank and Trade Acceptance Council, which was part of 
the Cleveland Chamber of Commerce. 

Symptomatic of general interest in the trade acceptance 
was the founding in May, 1918, of a publication devoted 
exclusively to it, called the Trade Acceptance Journal, and 
published by the National Trade Acceptance Bureau, Inc., 
of New York City. Mr. W. W. Wilmot, who had previously 
been connected with the National Association of Credit 
Men, was editor. The scope of the publication was later 
broadened and the title was changed to American Business 
and National Acceptance Journal, at the same time that 
the editorial staff was changed. Mr. W. L. Sparling is the 
present editor. 

Trade Associations and the Trade Acceptance. — But, 
after all, the business man was the determining factor in 

33 The list of publications on the trade acceptance includes : 
''Elements of Trade Acceptance Practice, " by Eobert H. Bean. 
''Abuses to be Avoided in Trade Acceptance Practice/' by David 
C. Wills. 



TRADE ACCEPTANCE MOVEMENT IN U. S. 129 

deciding whether or not the acceptance should be employed. 
As the Federal Reserve Bulletin (Review of the Month, 
September 1, 1917, issue) said: "The problem must be 
solved by the business man. Each trade must find a 
solution suitable to its own requirements. " It is therefore 
necessary to retrace our steps and to consider the question, 
not from the point of view of the organization of the cam- 
paign for the use of the trade acceptance, but from the 
point of view of those to whom the advocates of the 
instrument appealed. 

A considerable part of the efforts of the organizations 
cited above were directed to, and bore fruit through, trade 
association channels. As already indicated, addresses were 
delivered at conventions, and an active effort was made to 
obtain the endorsement of the instrument by the associa- 
tions. Many of the trade bodies themselves were actively 
interested in the acceptance, and in seeing whether, and if 
so, how, this previously little-known instrument might be 
of service to them. Added to their natural interest was 
the appeal made in 1917 on patriotic grounds. The usual 
procedure for these associations was to appoint a special 
trade acceptance committee, generally distinct from the 
ordinary terms or discount committee, to consider the mat- 
ter and report at the following convention, at which some 
further discussion was often had. Where opinion was 
favorable, a resolution was then passed endorsing the ac- 
ceptance. This work w T ith trade associations was especially 
pronounced from about 1917, until the middle of 1919. 
By this time the element of novelty had worn off, as the 
question had been widely discussed, and some general 
consensus of opinion had developed in most of the associa- 
tions as to the applicability and desirability of the accep- 
tance in their line. Likewise, all of the major associations 
had been approached by the advocates of the acceptance. 

Illustrative of the general work along these lines in the 



130 THE MECHANISM OF COMMERCIAL CREDIT 

trade associations were the activities in the hardware in- 
dustry. The subject was brought prominently before the 
industry by Mr. R. H. Treman in an address before a joint 
session of the American Hardware Manufacturers ' As- 
sociation and the National Hardware Association at 
Atlantic City on October 18, 1916. During the following 
year the secretary of the latter association issued consider- 
able literature on the acceptance, but he stated in his report 
at the 1917 convention that other trade bodies were putting 
it into operation more rapidly than were members of his 
own organization. The executive committee in its report 
also remarked that it believed the educational period had 
about passed. In some respects the work fitted into that 
previously carried on by the association, especially the part 
which concerned the observance by retailers of the terms 
quoted, but this apparently was not strong enough to over- 
come the usual wholesaler's objections to the use of the 
instrument. At the 1918 convention, the use of terms call- 
ing for 2 per cent 10 days, 1 per cent 30 days or 1 per cent 
10th proximo, net 60 days trade acceptance was discussed, 
but at the 1921 convention only 7 or 8 hands were raised in 
response to a question as to how many of those present used 
the trade acceptance. In the South, however, it has appar- 
ently fared better. In September, 1918, the matter was 
discussed at the Southern association's convention at 
Atlanta, and various groups agreed to use it. Quite a few 
members, especially in the South, had already employed 
terms of 2 per cent 10 days, net 30 days or 60 days trade 
acceptance, while the Texas Association in May of that year 
had favored these terms, and they were subsequently used 
in the south of the state. 

Opposition to the Trade Acceptance. — At no time dur- 
ing the course of the trade acceptance movement was 
opposition lacking. This opposition dates back to the days 
when the Federal Reserve Act was being framed. In many 



TRADE ACCEPTANCE MOVEMENT IN U. S. 131 

lines there was apathy or skepticism; in some, active op- 
position. Gradually this opposition crystallized in the lead- 
ing wholesale lines. Although efforts had been made to 
enlist their support, the associations in these lines remained 
unconverted and in some cases definitely opposed the trade 
acceptance. Most prominent among such lines was whole- 
sale groceries. Although the matter was presented to 
the National Wholesale Grocers' Association by no less 
an authority than Mr. Pierson (at the convention in 
Cleveland on June 14, 1918), the organization remained 
strongly opposed to the trade acceptance. At both this 
and the next convention, the association's Trade Accept- 
ance Committee, under the chairmanship of Mr. Sylvan L. 
Stix of Seeman Brothers, New York, presented an adverse 
report, holding that the trade acceptance would tend to 
lengthen terms and increase credit risks, and hence would 
be a step backward in their line. A resolution to this 
effect was approved by the Executive Committee in 1918, 
and similar resolutions were passed in the spring of that 
year by eight territorial associations and the executive com- 
mittees of another territorial association and the National 
Coffee Roasters' Association. The wholesale grocers have 
been among the staunchest upholders of the cash discount 
in the mercantile community, and have had a committee 
dealing with discounts on their purchases for many years. 
Other wholesale lines displayed less pronounced opposition, 
but some of them joined actively to resist the movement. 
Prominent among the leaders of the opposition was Mr. 
Wallace D. Simmons, President of the Simmons Hardware 
Company of St. Louis. 14 

A second group of opponents of the trade acceptance 

14 See an address on ' ' The Importance of the Cash Discount in the 
American Credit System," before the New York Wholesale Grocers' 
Association at New York, January 15, 1919; also an address on "The 
American Credit System," before the Southern Wholesale GroceTs' 
Association at New Orleans, May 8, 1919, 



132 THE MECHANISM OF COMMERCIAL CREDIT 

centered around Messrs. George H. Paine and John S. 
Jenks, Jr., of Philadelphia. These two gentlemen had 
been interested in American credit practice and Mr. Paine 
had followed the plan of reprinting and distributing arti- 
cles and addresses which he believed would be of interest 
to the banking and business community. As a result of 
their studies, by the middle of 1916, a modified form of 
acceptance had been devised, termed the "Jenks bill, ' ' 
which was designed to meet certain of the objections raised 
to the regular trade acceptance. At the opening of 1917, 
it was brought forward more definitely but its career was 
cut short by the advent of the war. 15 Messrs. Paine and 
Jenks have been in active correspondence with business men 
for years as to the principles underlying the credit system, 
and on several occasions have endeavored to obtain replies 
to a systematic list of questions as to the theory underlying 
the trade acceptance. Since the close of the war they have 
not brought the Jenks Bill forward again, but have con- 
tented themselves instead with continuing their opposition 
to the trade acceptance. 

The growth of the opposition to the trade acceptance is 
well illustrated in the situation which developed in the 
Chamber of Commerce of the United States. As will be 
recalled, this organization was one of the three which 
co-operated in 1917, in the movement leading toward the 
formation of the American Trade Acceptance Council. A 
trade acceptance committee was formed, and trade accept- 
ances were on the program at the annual meeting at 
Chicago in June, 1918, at which considerable discussion 
ensued. The question was raised that the Chamber was 
not officially committed to the trade acceptance and in 
accordance with its usual procedure could not be so com- 
mitted without a referendum. A special committee of 14 

16 Fot a full description of the bill, see Journal of the American 
Bankers Association, August, 1916, pp. 107 ff. 



TRADE ACGEPTANCE MOVEMENT IN U. S. 133 

members, composed of Messrs. Pierson, Hayes, Hirsch, 
Holdsworth, Hooker, Jenks, Nones, Simmons, Stix, Sulli- 
van, Tregoe, Treman, Wills and Woodruff, accordingly 
studied the subject with a view to submitting a report to 
the Board of Directors, which might in turn be sent to 
the entire membership in the form of a referendum. The 
committee contained ten members who had been more or 
less identified with the American Trade Acceptance Coun- 
cil, while the remaining four had been strong opponents of 
the acceptance. It could not find common ground for a 
unanimous report, and accordingly submitted separate ma- 
jority and minority reports to the Board of Directors. On 
October 1, 1919, this body voted that the reports should 
be edited and placed in the form of arguments in favor 
of and opposed to trade acceptances, and then distributed 
to the membership of the Chamber for their information, 
which was done. No referendum was held. 

Meanwhile, there was also some opposition in the ranks 
of those organizations which had taken the lead in ad- 
vocating the use of the trade acceptance. At meetings of 
the American Trade Acceptance Council, opponents of the 
instrument were in attendance and presented their ideas. 
As time went on, credit men who were not in favor of the 
trade acceptance gradually gave expression to their views, 
and these made their appearance in the Bulletin of the 
National Association of Credit Men. Among the leaders 
here was Mr. J. H. Scales, Treasurer of the Belknap Hard- 
ware and Manufacturing Company of Louisville. All in 
all, however, where active support was not found within 
the association, apathy was much more pronounced than 
definite opposition. 

The Post- War Period. — There was undoubtedly a consid- 
erable impetus given to the use of the trade acceptance 
during the war period. The movement was prosecuted 
much more vigorously, while there would also naturally be 



134 THE MECHANISM: OF COMMERCIAL CREDIT 

greater attention paid to it at a time when financial and 
credit problems were intensified. This was the period dur- 
ing which some firms created the " Liberty acceptance." 
On the other hand, the opponents of the instrument actively 
combated the patriotic appeal, and in the latter part of 
1918 received a letter from Governor Harding of the 
Federal Reserve Board in which he said: 

The Board has no desire to influence anyone to use the trade 
acceptance against his will and deprecates the use of the word 
"patriotism" in this connection. 

With the close of the war, the movement gradually lost 
momentum, as the period of stress was over, and, moreover, 
as each of the leading industries had been thoroughly can- 
vassed. By about the close of 1919, these conditions had 
become thoroughly established and a third period in trade 
acceptance history appeared, in which the use of the 
acceptance became more a matter of course. Mr. Orr has 
characterized it as follows in a letter to the writer : 

Now that the novelty of the acceptance has worn off it is not 
so commonly a subject of discussion. ... It has just become a 
natural way to handle certain accounts and no credit man thinks 
he is doing anything out of the usual to ask for acceptances. 
Therefore, he doesn't talk so much about it. 

The new period was thus characterized by a more 
judicial spirit and a more dispassionate discussion and 
careful weighing of the facts of the situation. It resulted 
in an effort to appraise more exactly the merits of the case, 
and to discount extravagant claims and counter-claims. 
This attitude had already been found previously in certain 
quarters. At the Chicago convention of the American 
Trade Acceptance Council in June, 1918, Mr. Warburg 
had said: 

Both sides, to my mind, have made the mistake of over-stating 
their case. The champions of the trade acceptance are not war- 



T&ADE ACCEPTANCE MOVEMENT IN U. S. 135 

ranted in saying that it is the only proper instrument of credit, 
that it should, or will, drive out rapidly all single name paper and 
the cash discount system, that to use it is the highest degree of 
patriotism and that to refrain from using it shows a lack of 
public spirit. On the other hand, it is equally unwarranted to 
assert that the use of the trade acceptance by the business men 
and bankers in the United States is impracticable, or that its' 
adoption makes for bad and unsound business habits. 

Careful observers as early as 1917, had discerned elements 
of danger in mistaken views that were being spread. As 
time went on, specific abuses appeared. These abuses were 
described by the American Acceptance Council in its 
Acceptance Bulletin, as follows: 

So far as we have learned, these practices have been largely, if 
not entirely, confined to houses of minor importance, and they 
were possibly not surprising in view of the period of credit strain 
which was endured last •summer and autumn, particularly in the 
textile lines, regarding which the complaints were most general, 
and the ignorance or lack of appreciation among the smaller and 
less well-informed commercial concerns as to the proper use of 
the trade acceptance. A flabbiness of commercial moral fiber may 
also have been a contributing cause. 

Criticism has also been heard of the trade acceptance with 
regard to its use in more or less speculative operations in 
goods between jobbers and middlemen, many of whom injected 
themielves into the textile markets during the period of as- 
cending prices, of silks, particularly, but other textile lines 
as well. 

The Council has been informed that speculators were prone to 
buy goods on trade acceptance terms which they would resell on 
similar terms and that the same goods would rotate by sale and 
resale among this class of speculative traders, with a trade accept- 
ance being issued in each case, so that before the maturity of the 4 
bill issued on the first sale, there might be several bills created in 
respect of new speculative transactions in the same banks of 
traders, and in some cases, these were discounted. 

These abuses were recognized from the opening of 1919 
on, by friends as well as foes of the acceptance, and atten- 



136 THE MECHANISM OF COMMERCIAL CREDIT 

tion was called to them. Thus the National Association of 
Credit Men said in its Bulletin that year : 

We must exercise vigilance that the remarkable instrument 
brought to us through the special provision of the Federal 
Reserve Act is not abused through willful ignorant misuse. Inci- 
dentally, we urge our members to approach the use of the* 
acceptance in orderly manner, and the acceptance forms and intro- 
ductory explanatory letter issued by the Association will help do 
this (p. 97). 

The best friend of the acceptance and of the Federal Reserve 
Board which has given the acceptance its support from the start, 
is he who immediately voices his disapproval on discovering an 
abuse or misuse of the acceptance, no matter how slight that abuse 
may be (p. 355). 

Mr. D. C. Wills delivered an address before the 1919 
Convention of the American Acceptance Council on 
"Dangers to be Avoided in Trade Acceptance Practice." 
The National Association of Credit Men also recognized 
the existence of abuses in the resolution at its 1920 con- 
vention endorsing the acceptance and emphasized its 
disapproval of them. An address was delivered by Dr. 
H. P. Willis, former secretary of the Federal Reserve 
Board, and at one time a staunch advocate of the 
use of the acceptance, before the New York State 
Bankers Association at Asbury Park, N. J., June 17, 
1920, on "Acceptances — A Neglected Element in In- 
flation." 

Trade Acceptances at Federal Reserve Banks. — Mean- 
while a change was also taking place in the status of trade 
acceptances at Federal Reserve Banks. On January 1, 
1919, all banks granted acceptances of 16-90 days maturity 
a preferential rate 1/4 per cent below that on ordinary 
paper, and the rate was 4 1/2 per cent in all districts 
except Kansas City and San Francisco, where it was 
4 3/4 per cent. It gradually, however, became the policy 
to reduce the number of classes of paper (especially by 



TRADE ACCEPTANCE MOVEMENT IN U. S. 137 

disregarding differences in maturity), and to bring the 
rates on different classes of paper more nearly into harmony 
with each other. Changes in rates were particularly pro- 
nounced in November and December, 1919, and on January 
1, 1920, there was a preferential rate of 1/4 per cent on 
acceptances having a maturity of not over 90 days in only 
6 districts (1/2 per cent on 61-90 day acceptances in one 
of these). The rate stood at 4 1/2 per cent in all these 
6 districts, at 4 per cent in 4 others, and at 5 per cent in 
2 others. During 1920, rates on all classes of paper and in 
all districts were greatly advanced, so that at the close 
of the year the rates were 5 1/2 per cent in 1 district, 6 
per cent in 6 districts, 6 1/2 per cent in 1 district and 7 
per cent in 4 districts, while preferential rates remained 
in only 2 districts, namely Cleveland (1/4 per cent) and 
Minneapolis (1/2 per cent). 

An indication of trade acceptance operations at Federal 
Reserve Banks throughout the entire period is afforded 
by the following figures, showing the volume discounted, by 
quarters. 

Volume of Trade Acceptances Discounted by Federal Reserve 
Banks Quarterly, 1915-1921 

(In thousands of dollars) 





1915 


1916 


1917 


1918 


1919 


'1920 


1921 


Jan.-Mar. 
April-June 
July-Sept. 
Oct.-Dec. 


320 
1,639 


989 

814 

1,038 

2,371 


2,193 

4,967 

3,871 

26,740 


49,446 
39,098 
47,501 
51,327 


28,345 
23,079 
25,541 
61,455 


50,904 
45,775 
44,628 
50,850 


45,136 
30,564 
25,428 
27,550 


Year 


1,959 


5,212 


37,771 


187,372 


138,420 


192,157 


128,678 



The volume of domestic trade acceptances bought in the 
open market has been very small as is shown by the fol- 
lowing figures for recent years: 



138 THE MECHANISM OF COMMERCIAL CREDIT 

Volume of Trade Acceptances m the Domestic Trade, 

Bought by Federal Reserve Banks in 

Open Market, Quarterly, 1919-1921 

(In thousands of dollars) 





1919 


1920 


1921 


January-March 
April-June 
July- September 
October-December 


1,876 
1,183 
1,475 
4,734 


1,143 

2,950 

418 

1,240 


85 


Year 


9,269 


5,751 


85 



Trade acceptances, for a good while after the formula- 
tion of the Board's regulation in 1915, were taken only 
very sparingly by banks, partly because of the practice 
of owners of such acceptances of holding them without 
discounting, and partly because of the greater familiarity 
of the banks with the straight single name note. For the 
same reasons they were presented only very sparingly to 
Federal Reserve Banks and but few of them found lodg- 
ment there. A considerable falling off is shown in 1921. 



CHAPTER VIII 

EXTENT OF USE OF THE TRADE ACCEPTANCE 

A number of surveys have been made of the extent to 
which the trade acceptance is employed. Most of them, 
however, have been partisan in the sense of having been 
made either by friends or by foes of the acceptance. In 
most of them the endeavor has been to address a question- 
naire to business houses which may be using the instrument, 
covering such matters as the extent to which the firm 
addressed uses the acceptances on its accounts, its experi- 
ence, etc. Inquiries have also been addressed to banks 
covering the practice of their customers, as well as their 
own procedure. Surveys such as these are of interest as 
indicating, in a general way, the field of use and the 
problems arising in connection with the instrument. These 
problems including the difficulties encountered in introduc- 
ing the acceptance, the attitude of the banks as to the rate 
of discount and amount of credit extended on acceptances 
as contrasted with ordinary single name paper, the effect 
of the use of the instrument upon collections, and the use 
of the acceptance on a firm's purchases as well as on its 
sales. Particularly were such surveys of value in the early 
stages of the movement. As the acceptance became more 
thoroughly developed, these studies became defective in 
that they failed to recognize the peculiar conditions found 
in different industries, and did not serve to indicate defi- 
nitely the particular fields of business to which the 
acceptance appeared most applicable. Analysis of this 
kind should be the second step in a study of the question, 

139 



140 THE MEGSANISM OF COMMERCIAL CREDIT 

supplementing the earlier, more general surveys. The data 
for such an analysis are available in Part III of the present 
work, and will be brought together later in the present 
chapter. Some of the surveys of the kind just described 
also include questions designed to elicit opinions on the 
theory of the acceptance, as will be indicated below. 

Surveys of the Use of the Acceptance. — At various times 
published statements have appeared as to the number of 
firms known or believed to be using the trade acceptance. 
A committee of Federal Reserve Agents reported in De- 
cember, 1916, that they had a list, known to be very 
incomplete, of 70 companies belonging to 40 lines, and 
located in 18 states. Dealers in cotton, cotton goods and 
cotton mills were most prominent, with the lumber indus- 
try second. The trade acceptance appeared to have had 
a readier reception among concerns of smaller capital, 
although a number of high rated companies also were in- 
cluded. It was said in the Journal of the American 
Bankers Association for November, 1917, that it was plain 
that the West was waiting to see what the East was going 
to do on trade acceptances, but was ready and willing to 
fall into line. The following issue stated that about 1600 
representative wholesale firms had adopted it as a substi- 
tute for the open account. The report of the Association 's 
Trade Acceptance Committee at the 1918 convention stated 
that while a year before there were 185 known users of 
the trade acceptance, the number had increased to many 
thousand during the year. From this time on, figures 
given are generally estimates, and are designed to include 
those firms which use the acceptance only in infrequent 
cases, as well as those which make it an integral part of 
their terms. Mr. R. H. Bean, Executive Secretary of the 
American Acceptance Council, estimated under date of 
October 22, 1921, that upwards of 25,000 firms were using 
acceptances, and stated that the number was constantly 



EXTENT OF USE OF TRADE ACCEPTANCE 111 

increasing. Some leading authorities believe that 90 per 
cent or more of the trade acceptances now used are em- 
ployed as collection instruments, but hold that this makes 
for closer collections, and hence is a step toward better 
credit. 

The trade acceptance did not receive attention from the 
business community immediately, but active discussion 
began in 1916. The first survey accordingly was com- 
menced in that year, and up to 1921, 10 inquiries have come 
to the writer 's notice, as follows : 

1. Federal Reserve Board in 1917. 

2. Federal Reserve Agents in 1916-1918 (partly referred 
to above). 

3. The National Association of Credit Men in 1916-1918 
(not available). 

4. The American Trade Acceptance Council in 1917- 
1918 (not available). 

5. The Business Bourse of New York in 1918. 

6. Mr. W. W. Wilmot of the Trade Acceptance Journal 
in 1918 (not available). 

7. Messrs. Paine and Jenks of Philadelphia in 1917-1918. 

8. The National Association of Manufacturers (not 
available). 

9. Survey of 1918. 

10. Mr. Park Mathewson, of the Business Bourse, in 
1921. 

Certain of these inquiries included banks as well as busi- 
ness houses, and some covered the theory as well as the use 
of the instrument. The results of some of the investiga- 
tions, however, are not available, and they are accordingly 
omitted in the discussion which follows. 

The Federal Reserve Board Inquiry of 1917. — Numer- 
ous inquiries received during the early part of 1917 led 
the Federal Reserve Board in June of that year to author- 



142 THE MECHANISM OF COMMERCIAL CREDIT 

ize an informal inquiry tinder the direction of the secretary 
into the conditions under which the trade acceptance was 
then being used. Replies were received from 368 banks 
and 385 business houses, and of these 242 bank and 203 
mercantile letters alone gave actual information. Addi- 
tional material was received from certain Federal Reserve 
Banks, mercantile associations and independent investi- 
gators. The results of the study may be summarized as 
follows : 

Banks' Data: 

1. The large majority of answers stated that the number of a 
bank's clients who requested customers to whom they sold 
to furnish trade acceptances was either negligible or nil. 
Only 6 of 63 banks reported over 6 firms making such a 
request. 

2. Of the concerns which were asking their customers to furnish 
acceptances, practically none were known to be giving 
trade acceptances to those of whom they purchased. 

3. In the majority of cases where acceptances were being re- 
quired, the action was taken with a distinct view to pre- 
senting the paper for discount at the bank. 

4. Owing to the comparative scarcity of acceptance paper, no 
specified rate on trade acceptances was in effect on July 2, 
1917, but each case was treated on its individual merits. 

5. Of 148 banks, 70 either made a rate lower than on the direct 
note of the concern, usually from y 2 per cent to 1 per cent, 
or would make such a rate should acceptances be offered*, 
while the remainder granted or would grant the same 
rate on both forms of paper. 

6. Of 167 banks, 153 would grant a larger line on trade ac- 
ceptances, while the remainder would merely grant the 
same line. The proportion of increase generally varied from 
10 to 100 per cent. 

Business Houses' Data: 

1. Forty-five concerns at that time requested their customers 
to give trade acceptances, while 141 were not in the habit 
of doing this. 



EXTENT OF USE OF TRADE ACCEPTANCE 143 

2. Eleven were in the habit of giving acceptances themselves, 
while 176 were not. It appeared to be the custom among 
those who were inclined to the use of the acceptance to 
request the instrument of customers but not to offer it them- 
selves to creditors. A considerable number of the 45 houses 
that asked customers to give acceptances did not habitually 
do so, but in most cases requested them from concerns 
which were slow in payment. 

3. Of 55 houses, 51 believed (based in the majority of cases 
upon opinion) that the trade acceptance would be paid 
more promptly ' than would the open account. 

4. Of 44 houses, 22 were in the habit of discounting ac- 
ceptances held by them, while the other 22 were not. Of 31 
concerns, only 8 received or had been promised a lower 
rate than on straight paper. 

5. Of 15 concerns, 9 were receiving or had been promised a 
larger line of credit on trade acceptance. 

6. Of 46 concerns not in the habit of asking or giving trade 
acceptances, because of credit conditions prevailing in their 
particular branch of trade, 26 approved the principle but 
the other 20 expressed themselves as strongly opposed to 
the idea of the acceptance. 

Inquiries of Trade-Acceptance Advocates in 1918. — 

Neither the inquiries of the National Association of Credit 
Men, extending from 1916 on, nor the inquiries of the 
American Trade Acceptance Council, commencing in 1917, 
were systematic, but consisted rather of letters received at 
various times from business houses using the trade accept- 
ance. Aside from the material published by both bodies, 
the results of these inquiries are not available. 

In 1918, the Business Bourse, a commercial organization 
with headquarters in New York, also undertook an investi- 
gation. The outcome of the inquiry on the whole was 
favorable, and the statements of the organization were evi- 
dently made with the intent of sustaining and furthering 
the development of the instrument. While the arguments 
presented in favor of the trade acceptance were the familiar 
statements often contained in trade acceptance literature, 



144 THE MECHANISM OF COMMERCIAL CREDIT 

of over 200 individuals with whom the organization had 
corresponded, all of whom were using trade acceptances, 
only one appeared to be dissatisfied. Many of those who 
expressed themselves favorably on the question, however, 
were using it as a collection instrument. 

Mr. W. W. Wilmot of the Trade Acceptance Journal, 
who had formerly been with the National Association of 
Credit Men, addressed a letter in September, 1918, to about 
800 persons in which he asked 5 questions about the atti- 
tude of banks toward the trade acceptance, the results of 
which, unfortunately, are not available. 

Investigation of Messrs. Paine and Jenks. — In 1917, an 
inquiry was also made on behalf of Messrs. George H. Paine 
and John S. Jenks, Jr., of Philadelphia, by Professor John 
J. Sullivan of the Department of Law of the University of 
Pennsylvania. The character of the inquiry will be seen 
from the following questionnaire which was sent out : 

1. In View of the long established and admittedly sound prac- 

tice in this country whereby a seller of goods 
offers the buyer, for prompt payment ("cash"), 
a premium ("discount") greatly in excess of a 
bank's interest charge for the full credit period ; 
and 

In View of the facilities now offered by the Federal Re- 
serve Banks to enable local banks to finance 
local merchants in their purchase of commodi- 
ties needed by the local communities; 

I Would Ask: Should we not discourage a practice which 
requires the seller to bear the burden of financ- 
ing the buyer, and encourage instead, a practice 
which will facilitate local bank financing of 
the local merchants and thus enable the local 
merchant (the buyer) to take advantage of the 
premium ("discount") offered by the seller for 
prompt payment ("cash") ? 

2. In View of the fact that the buyer of goods receives, in the 

quotations and the invoices covering his pur- 



EXTENT. OF USE OP TRADE ACCEPTANCE 145 

chases, a specific offer of a large premium 
("discount") for payment within (usually) ten 
days; and 

In View of the fact that this premium ("discount") is 
practically interest at an exceedingly heavy 
rate, considering- the fixed period within which 
the buyer is pledged to pay ; 

I Would Ask: Should any written promise of payment 
(regardless of its form) which is signed by a 
buyer who fails to take the large "cash" 
premium ("discount"), be deemed such com- 
plete evidence of that buyer's ability to pay as 
to warrant a banker or a seller of goods in 
largely increasing the amount he would other- 
wise lend or sell to that buyer? 

3. In View op the offer of a large premium ("discount") 

usually made by a seller to a buyer for prompt 
payment ("cash") ; and 

In View of what has been said condemning the "open ac- 
count" and the commercial credit practice out 
of which that grew; that is to say, the seller 
financing the buyer for the credit period at 
what amounts to an excessive and usurious 
interest rate; and 

In View of the rediscount facilities now offered by the Fed- 
eral Reserve System which enable local banks 
to finance any sound local merchant in the pur- 
chase of commodities for his locality; 

I Would Ask: Is an open account, or any written promise 
of payment (regardless of its form), of a buyer 
who fails to take advantage of the large 
premium ("discount") offered by a seller for 
prompt payment ("cash"), a consistently good 
investment at its face value for a commercial 
house or a bank? 

4. In View of what has been said in connection with the pre- 

ceding questions; 
I Would Ask : When a buyer takes up his own account by 
signing negotiable paper for the amount there- 
of, which the seller endorses and then gets his 
bank to discount, does not this mean that the 



146 THE MECHANISM OF COMMERCIAL CREDIT 

seller is lending his own credit to finance the 
buyer's purchase of goods, and is not the seller 
practically an accommodation endorser! 

About 160 answers were received, including those of both 
business men and students. The majority of the answers 
were accompanied with interesting and illuminating letters. 
Professor Sullivan analyzed these as follows: 

1. That under existing commercial practice most trades have 
become habituated to the use of the so-called "cash discount" 
which, in accordance with that practice, the seller almost uni- 
versally offers the buyer for prompt payment. With few 
exceptions the business houses of the country show themselves 
inclined to maintain this practice. 

2. That when this premium or "cash discount" is offered, it is 
only in transactions where the buyer fails to take it that a 
trade acceptance can be used. 

3. That, as this premium or "cash discount" equals an interest 
rate of from 14 per cent to 40 per cent per annum, the buyer 
who fails to take it must be either an inferior credit risk or 
a poor business man. 

4. That financing of the buyer by the seller is wrong in prin- 
ciple, and is the great weakness in our commercial system, 
no matter in what form it is practiced, open accounts, notes 
or acceptances. 

5. That the premium or "cash discount," offered the buyer for 
prompt payment, is the seller's weapon against the practice 
of his financing the buyer. 

6. That the buyer represents his community and not the seller. 
Therefore, the buyer's community should finance him and, 
where the buyer properly represents it, it will and can do 
this through its bank or banks, in order to escape payment 
of the high cost of credit which the buyer must pay if the 
seller finances him and which the buyer, so paying, must in- 
clude in his price to the community. 

7. That some communities have been without adequate banking 
facilities but the increased powers and privileges granted 
banks under the Federal Reserve System enable this disability 
to be effectually removed. 

8. That all efforts to make changes should be to force and 
develop local financing of th# buyer. 



EXTENT OF USE OF TRADE ACCEPTANCE 147 

Under date of December 28, 1917, these were sent to each 
gentleman who had replied to the questionnaire, and many 
further letters were received, expressing substantial agree- 
ment with the conclusions. 

Survey of 1918. — In the autumn of 1918, an impartial 
investigator addressed a questionnaire to about 250 busi- 
ness houses and about 125 banks, the aim being to cover 
all the leading lines and all sections of the country. 

The general conclusions reached, based both upon this 
survey and upon the results obtained by previous investi- 
gators, were as follows : 

1. The trade acceptance had obtained a footing with a number 
of banks and business houses in various parts of the country, 
although terms of payment were unfavorable in certain lines 
and prevented its use in them. 

2. Many of the business houses favoring the acceptance did so 
chiefly on the ground that it afforded a superior means of 
collection. 

3. The line of credit extended on trade acceptances as against 
that on single name paper appeared to be larger only in 
proportion as the credit of acceptors was superior to that of 
the seller presenting the acceptance for discount. 

4. Preferential rates, from y 2 to 1 per cent under the regular 
rate, were being made on acceptances by but few banks, 
while some who had not had any trade acceptances presented 
to them, were willing to make a special rate under suitable 
conditions. 

5. Practically universally it was desired to maintain the cash 
discount system. Trade acceptances were regarded as pri- 
marily applicable to accounts taking the net terms. 

6. Business houses using the trade acceptance generally sug- 
gested 3 methods of settlement to customers — cash discount, 
trade acceptance or open account, varying in degree of desir- 
ability in the order named. Some firms offered a discount 
smaller than the cash discount for trade acceptance settle- 
ment. 

7. In most cases where trade acceptances were requested, the 
seller asked the buyer to mail him a trade acceptance direct. 

8. Considerable difference of opinion existed among well- 



148 THE MECHANISM OF COMMERCIAL CREDIT 

informed business men and bankers with reference to the 
benefits of the trade acceptance as a credit instrument. 
9. A considerable number of practical and technical difficulties 
were involved in the use of the trade acceptance. 

Investigation of Park Mathewson in 1921.— The latest 
survey which has come to the writer's attention is that 
appearing in Chapter XVII of a work on Acceptances, 
Trade and Bankers (New York, 1921), by Mr. Park 
Mathewson, Vice-President of the Business Bourse of New 
York, who favors the acceptance. The results are sum- 
marized by Mr. Mathewson as follows: 

The answers indicate that trade acceptances are being used suc- 
cessfully in all lines of merchandising trade. The replies show 
earnest attention to the plan by those using them, but do not show 
standardized methods or results. 

In detail, the results were as follows: 

1. Thirty-five per cent of reporting firms had used them, 65 
per cent had not. The average length of time for which 
used was less than a year. 

2. Ninety-four per cent thought them advantageous, 6 per cent 
did not. 

3. The customers of 50 per cent welcomed the trade accept- 
ance, of 10 per cent resented them and of 40 per cent 
ignored them. 

4. Various objections were given by customers, and efforts 
made to overcome these objections. 

5. The salesmen of none of the firms objected to the trade 
acceptance. 

6. The banks of some of the firms opposed the trade accept- 
ance, of others favored them, and of others were apathetic. 

7. Ninety-nine per cent of the firms made practically no objec- 
tion themselves to the trade acceptance. 

8. None of the firms found that it interfered with their one 
name paper or line of credit, and 99 per cent found that it 
increased their line. 

9. Fifty per cent discounted all the acceptances they received, 
20 per cent discounted none, 10 per cent discounted half, and 
the percentage for the remainder varied. 



EXTENT OP USE OF TRADE ACCEPTANCE 149 

10. Ten per cent paid an average rate of over 6 per cent; 50 
per cent an average rate of 6 per cent; 10 per cent an 
average rate of 5y 2 per cent, and 30 per cent an average 
rate of 5 per cent. 

11. Sixty per cent of the firms had none returned unpaid; 15 
per cent had 1 per cent; 10 per cent had from 2 to 5 per 
cent; 10 per cent had 2 per cent; 5 per cent had from 5 
to 10 per cent. 

12. Ten per cent gave no inducement over the regular terms to 
the buyer for signing acceptances, while the concessions of 
the remainder varied, some granting a discount up to 2 per 
cent, and other extra time up to 60 days, and some both. 

13. One hundred per cent found that accounts were paid 
more promptly with trade acceptances. Sixty per cent 
found that it saved time in bookkeeping and 95 per cent in 
dunning. 

14. Ninety-five per cent found a benefit from having accounts 
in more liquid form. 

15. Only 5 per cent received a preferential rate on acceptances 
over one name paper, averaging % per cent. 

16. Practice varied as to paying their own bills with acceptances. 

17. The trade associations of 65 per cent favored acceptances, 
while those of the other 35 per cent were not on record. 

Present Use of the Trade Acceptance. — It is in order 
now to take up the second type of study mentioned at the 
opening of the chapter. This involves an analysis of the 
directions and the fields in which the acceptance has found 
its major use. It should be mentioned at the outset that 
in no line has the impetus towards the use of the trade 
acceptance been so strong as to lead to the regular use of 
net terms only, the cash discount then being abolished in 
the line. This has merely been done by individual houses 
in a variety of industries, but in no one line can a marked 
tendency in that direction be said to have been evident. 
The trade acceptance has thus been introduced alongside 
of, and as an adjunct to, the existing cash discount system, 
and has been subject to all the limitations of introduction 
in such a manner. It has also been used primarily by 



ISO THE MECHANISM OF COMMERCIAL CB^DIT 

manufacturers, for the leading wholesale lines have gen- 
erally been strongly opposed to it, although the Southern 
Wholesale Dry Goods Association in 1918, adopted a reso- 
lution in favor of it, and the National Hardware Association 
distributed considerable literature relative to it. Especially 
is this the case where the terms themselves usually are 
short and where great emphasis has been placed upon the 
cash discount in connection with the wholesalers' purchases, 
as in the case of groceries. On the other hand, in whole- 
sale lines where terms are longer, and in which consider- 
able trading occurs, such as the textiles, the opposition is 
not nearly so strong, and the instrument is more often 
used. Some houses in each of the other lines mentioned, 
it is true, have also used it, but they form only a small 
minority. As has already been indicated, the wholesalers, 
in general, place leading emphasis on the cash discount, 
and at least on this ground are suspicious of the trade ac- 
ceptance. This means also that the trade acceptance is not 
used on sales to them, especially as they are supposed to 
discount their bills. It is primarily used by manufacturers 
on sales to other manufacturers, retailers, or industrial 
consumers. 

"Within this field of possible use, certain other limitations 
are found. The trade acceptance is generally not found 
where terms are very short — one month or less, although 
some 30-day trade acceptances are used, such as on flour in 
the Southeast, and on jobbers' sales of electrical products. 
Moreover, the trade acceptance is not used where invoices 
are very small, unless they are grouped and one trade 
acceptance given for purchases made during the preceding 
week, fortnight or month. The instrument is then gen- 
erally found where the terms are medium to long, and bills 
are fair-sized. Finally, the trade acceptance appears as a 
result of dissatisfaction with the existing practice of hav- 
ing the net terms run on open account. It generally makes 



EXTENT OF USE OF TRADE ACCEPTANCE 151 

its appearance either as a means of prompter collection 
from the poorest accounts, appearing alongside the open 
account, or, in other lines where such abuse is widespread, 
as a general means of covering the accounts taking the net 
terms. In either case, the purpose is the same. 

These factors indicate the general lines along which trade 
acceptance development has proceeded. In the past, the 
acceptance had already been used in certain lines where 
terms were rather long, such as for leaf tobacco, the cheaper 
domestic cigars and jewelry. In some of these lines part 
of the buyers were often granted open account terms, while 
the remainder gave either an acceptance or else a note. 
Much of the current use of the acceptance in other lines 
has been in the same general manner — as a collection instru- 
ment on that part of the accounts of a firm which might 
be slow if allowed to run on open account. Many manu- 
facturers, for example, of metal products, have sought to 
introduce it in this way on some of their accounts. Some 
leading authorities estimate that at least 90 per cent of the 
acceptances now in use are employed as collection instru- 
ments. 

In other lines, the introduction of the acceptance has 
been advocated in connection with a desire to substitute 
embodied for unembodied credit in the case of all those 
who take the net terms in the industry in question. Manu- 
facturers of agricultural implements have for some years 
urged dealers to obtain paper from customers, and their 
own terms in turn call for paper where their bills are not 
discounted. At first the note was advocated for this pur- 
pose, but more recently the trade acceptance has been 
favored. Another illustration of this desire to use em- 
bodied in place of unembodied credit in the case of all 
those accounts which take the net terms, is found in the 
lumber industry, both as between manufacturers and 
wholesalers, and as between wholesalers and retailers. 



152 THE MECHANISM OP COMMERCIAL CREDIT 

Finally another field of use for the trade acceptance has 
been opened in connection with season datings. Here the 
purpose is not to introduce greater definiteness into the 
obligation of buyer to seller, but rather to give the seller 
a specific instrument evidencing the transaction. Under 
such conditions the acceptance does not embody only the 
credit of the inferior accounts, but includes the first class 
accounts as well. Most conspicuous among these lines has 
been automobile tires, where the acceptance has been used 
in connection with spring payment for winter shipments. 
Terms on subsequent current shipments are, however, 5 per 
cent 10th proximo. No acceptance is used on them at all, 
but they run entirely on open account. 



CHAPTER IX 

THE NET-TERMS SYSTEM VERSUS THE CASH-DISCOUNT SYSTEM 
— CREDIT ASPECTS 

In considering the commercial credit system critically, 
and contrasting existing practice with the trade acceptance 
plan which has been proposed, it is necessary to keep clearly 
in mind the real problems involved. Much misconception ex- 
ists as to the trade acceptance, and many of the discussions, 
both by those in favor and those opposed, have this defect 
in common. In fact, it will shortly be seen that the trade 
acceptance is not a fundamental element in the situation, 
but that the underlying distinction is quite different. The 
contrast is actually between a system in which net terms 
alone are found, and one in which they exist in conjunction 
with a cash discount. Furthermore, the issue is by no 
means clear cut. Each system has certain" advantages and 
likewise certain disadvantages. That is to say, each system 
is peculiarly adapted to certain conditions, at the same 
time that it is less suited to other conditions. This suggests 
the desirability of directing the analysis toward a careful 
examination of the real field of use of each, instead of an 
attempt at too sweeping generalization. Neither system is 
wholly good nor wholly bad. 

Alternative Systems of Finance. — It is desirable at the 
outset to indicate clearly the contrast between the several 
systems of commercial credit and finance which may be 
employed. In doing this, certain of the points already 
mentioned at various places in the book will be recalled. 
As has just been stated, the actual contrast is not accord- 

153 



154 THE MECHANISM OF COMMERCIAL CREDIT 

ing to the form of obligation existing between buyer and 
seller, or between either of them and the bank. This is 
quite secondary to the distinction according to the time 
granted the buyer by the seller. In other words, with a 
system in which net terms alone are quoted, is to be con- 
trasted a system in which several options are given, namely 
payment net at the close of a certain period, or payment 
at the close of one or more shorter periods, in which case 
specified discounts may be deducted. Under the one sys- 
tem, for example, terms will be net 60 days; under the 
other, 2 per cent 10 days, net 60 days or less often 2 per 
cent 10 days, 1 per cent 30 days, net 60 days. These two 
systems may conveniently be called respectively the net- 
terms and the cash-discount systems. 

Not only does this raise the question of credit arrange- 
ments between buyers and sellers of goods, but it also raises 
broader questions of finance in general. These questions 
include the relation of both buyer and seller to the bank, 
and the problem how the paper representing, either directly 
or indirectly, funds supplied for the transaction, gets into 
the bank. Under the net-terms system, the seller carries 
the buyer, and supplies the funds involved. Presumably 
he does this, and his net terms run, for a period of time 
equal to the buyer's marketing period. The seller then 
borrows in turn from his bank in order to obtain these 
funds. He may do this either directly on his receivables, 
or merely on the basis of his general statement, .of which 
the receivables become an integral part. In any event, he 
has a specific body of receivables which he in effect is 
able to shift in some measure to the bank. 

With the cash-discount system, the situation is some- 
what different. Those accounts which do not take the 
discount are financed through the seller in the manner 
just indicated. But, inasmuch as the cash discount ex- 
ceeds the current rate of interest, it is profitable for the 



NET-TERMS SYSTEM— CREDIT ASPECTS 155 

buyer, wherever possible, to take the discount. This means 
that, where his own funds are insufficient, he will, if pos- 
sible, borrow from his bank, in order to take the dis- 
count. This he will do on the basis of his general position. 
Under the cash-discount system, buyers are therefore 
divided into two classes, which are financed in different 
ways. A select part are financed directly at their own 
banks, while the remainder are financed through the sellers 
at the sellers' banks. 

The Net-Terms System and the Trade-Acceptance Sys- 
tem. — The cash-discount period is usually short, and no 
special paper is used in connection with it. The net-terms 
period fs longer, and several alternatives exist. The credit 
may be either unembodied and run on open account, or 
may be embodied in the sense of being represented by a 
specific credit instrument. This may be either a note of 
the buyer or a trade acceptance, both being substantially 
similar from this point of view, in spite of their other 
differences. Where the trade acceptance is used in this 
way as an adjunct to a cash-discount system, it embodies 
inferior credit. The best accounts borrow from their banks, 
and discount their bills, while the poorer accounts who 
either cannot borrow or else have already obtained their 
full line of credit from their banks, give trade acceptances. 
But if a trade acceptance is to represent the best paper, 
the best accounts must not be given the opportunity to 
borrow directly from their own banks. They must there- 
fore be quoted only net terms, the same as the other 
accounts. That is to say, if the trade acceptance is to be a 
first class instrument, the trade-acceptance system must 
mean a system in which net terms alone are quoted. In 
short, with the cash-discount system is to be contrasted 
the net-terms system. The question then practically be- 
comes this: should we have a cash discount, or should we 
not? 



156 THE MECHANISM OF COMMERCIAL CREDIT 

The fact that the trade acceptance may be used in the two 
ways just indicated has caused much confusion in current 
discussion. The advocates of the cash-discount system call 
attention to the points just mentioned. On the other hand, 
advocates of the trade acceptance have often contended 
that there is no essential antagonism between it and the 
cash discount. "No foundation can be discovered for this 
fear, ' ' said the Board of Directors of the National Associa- 
tion of Credit Men at its annual meeting in Atlantic City 
in September, 1918, "for sales terms are not changed by 
the use of the acceptance, but it is merely an acknowledg- 
ment of the obligation. ' ' This is true only if the require- 
ment that the trade acceptance be first-class paper is 
waived. The acceptance is then used primarily as a col- 
lection instrument, and as such is to be contrasted with 
the open account. Trade-acceptance advocates in fact are 
fond of drawing this contrast. They compare the trade- 
acceptance system with the open-account system, while 
opponents on the other hand compare it with the cash- 
discount system. In other words, each group tends to 
adopt a different point of view, and to stress a different 
phase. 

The Problems Involved. — Much of the literature for and 
against the trade acceptance is addressed directly to the 
business man, and is designed to convince him that he 
should either use or oppose the instrument. Data of this 
kind naturally base their appeal upon those considerations 
which most directly affect him, and thus make much of 
arguments that are by no means fundamental. These argu- 
ments are usually listed in more or less parallel column 
fashion. Without disparaging in the least the value of 
work of this kind, it is necessary for the present purpose 
to approach the matter somewhat differently. A broader 
point of view must be adopted than that of the individual 
business man and his immediate self-interest. The various 



NET-TERMS SYSTEM— CREDIT ASPECTS 157 

aspects which the two systems of finance involve must be 
considered, and the tests which they should meet. 

Fundamental Tests. — The initial point which should be 
kept in mind is this: the problem is a minimal one — the 
maximum of efficiency at the minimum of cost. This does 
not mean that the best system, irrespective of cost, nor the 
cheapest system, irrespective of efficiency, is desired. It 
requires a system which functions or does the work satis- 
factorily at reasonable cost or expense. This system, more- 
over, need not be the same under all conditions; what is 
best under one set of circumstances may be worst under 
another. 

But what work should the system do? 1. It should pro- 
vide an efficient and economical means of credit extension. 
Each individual should receive the amount of credit to 
which he is entitled, and which, when granted, will enable 
the economic system to ©perate satisfactorily, and he should 
receive this credit for a length of time sufficient for his 
operations. This naturally involves several auxiliary ques- 
tions. What agency should directly measure the credit, 
and, inasmuch as the bank in last analysis supplies all the 
funds involved, what method of credit measurement should 
it employ? In addition to matters connected with the 
granting of credit, it also involves the termination of credit 
arrangements — the liquidation of the credit at the close of 
the period for which it is extended. 

In performing its service in connection with the granting 
and terminating of credit, the system should foster efficient 
and economical business practice on the part of the com- 
munity. It should also not bring undesirable events, such 
as price changes, in its wake. These aims will be achieved 
by an efficient credit system, but incompetence will lead 
to undesirable consequences along these two lines. 

2. The system should be such as to permit efficient and 
economical operation of the banking system. Questions 



158 THE MECHANISM OF COMMERCIAL CEEDIT 

auxiliary hereto concern the relation which prevails be- 
tween the borrower and the bank, and the paper which the 
banking system and the open market receive. These mat- 
ters relate solely to the banking system, and treat the 
problem from that point of view, instead of being con- 
cerned with the general credit aspects indicated under the 
first head. 

It should be emphasized that in applying these tests, 
standards or criteria, whichever they may be termed, the 
operation of a system wherein net terms alone are found 
should be contrasted with one in which both a cash dis- 
count and net terms are found. It is important to remem- 
ber that in the latter system financing occurs in two ways. 
This system is actually neither a cash-discount system nor 
a net-terms system, but a combination of both. This com- 
bination is to be contrasted with a system in which net 
terms alone are found. 

Agency for Credit Measurement. — As already indi- 
cated, under a net-terms system, the seller directly measures 
the credit of the buyer of merchandise. Under a cash-dis- 
count system, the same is true with those buyers who do 
not discount their bills, but the bank measures the credit 
of those buyers who borrow from it in order to take the 
discount. ^Yhere a cash-discount system prevails, buyers 
are therefore divided by means of the discount into two 
classes. The credit of each class is measured by a different 
agency — the bank for the best accounts who discount their 
bills, and the seller for the poorer accounts who do not 
discount, and who have been recognized by the bank as 
not worthy of credit from it. But the seller in turn finds 
it necessary to borrow in order to enable him to carry these 
accounts. To the extent that he does this, his bank in 
turn measures the credit. It considers the receivables 
which he possesses either specifically or as part of his gen- 
eral assets, and to a greater or lesser degree checks the 



NET-TEEMS SYSTEM— CREDIT ASPECTS 159 

credit which he has previously granted. Under a cash- 
discount system, therefore, the buyers' local banks measure 
the credit of part of the buyers, and the seller, checked in 
turn to some degree by the seller's own bank, that of the 
remainder. Under a net-terms system, the second method 
of course prevails on all the accounts. The situation may 
be summarized as follows : 

Net-terms system 

Seller measures credit of buyer 
Seller 's bank rechecks 
Cash-discount system 
Local bank separates accounts into two 

classes— best and poorer. 
Best accounts 

Local bank measures credit of buyer 
Poorer accounts 

Same method as under net-terms system 

These considerations naturally raise the question : who is 
better fitted to measure the credit — the seller and indi- 
rectly the seller 's own bank, or the local bank of the buyer ? 
It should be noted that the contrast is of more limited 
applicability than is often implied by writers on the sub- 
ject, who ignore the fact that under the cash discount 
system the local bank measures the credit of only part of 
the buyers. Moreover, even granting that the local bank 
were a better judge of credit than the seller, it exercises its 
judgment only on the best accounts. The seller is left to 
exercise his judgment on the poorer accounts, and in effect 
to guarantee them to the bank, exactly as is the case on all 
accounts under the net terms system. In other words, 
precisely where expert judgment is most needed, the cash 
discount system fails to apply it. The advantage which 
it affords to the seller is derived and secondary. He is 



160 THE MECHANISM OF COMMERCIAL CREDIT 

relieved of the credit work on part of his accounts, and is 
thus enabled to concentrate his attention upon the poorer 
buyers. This relieves him of some risk and expense, and 
may tend to reduce his bad debt loss. The importance of 
this factor will vary greatly as between different industries, 
but in any event the considerations noted serve to indicate 
the limits which exist to the usefulness of the cash-discount 
system. 

Relative Merit of Seller and Bank. — The question 
remains whether the bank is a better judge of credit than 
is the seller. This raises the question whether the credit 



SHOES GROCERIES HARDWARE 



CREDIT 

SALE AND 
SHIPMENT 

STOCKING 
PURCHASE 




problems of individual industries may be separated from 
the manufacturing and merchandising problems and given 
over, or at least the larger part of them, to the bank. The 
wholesale shoe, grocery and hardware businesses must all 
purchase certain merchandise, keep it in stock, sell and 
ship it out, and extend credit to those to whom they sell. 
Other industries, both manufacturing and wholesale, are 
confronted with similar merchandising and credit problems. 
Are the credit problems which individual business houses 
throughout the economic system as a whole face, so similar 
as to render it possible to take a cross section through the 
economic system and segregate these problems? If this is 



NET-TERMS SYSTEM— CREDIT ASPECTS 161 

not so, are the credit problems which the grocer faces in- 
stead first and foremost matters pertaining to the grocery 
business, and only secondarily, credit problems allied to 
the credit problems found in other lines? In other words, 
is the cleavage in the figure opposite vertical or hori- 
zontal ? 

It has been argued x that under the modern division of 
labor, production is localized, but industry is on a large 
scale, and therefore credit should be specialized and placed 
in the hands of experts in this particular field. This raises 
a question similar to that just indicated, namely, which 
direction should specialization take? Should the credit 
problems in the grocery business be handled by those who 
are primarily specialists in that business, or by those who 
are primarily specialists in credit ? This is largely a matter 
of the size of the particular bank in any given case. The 
credit department of a large bank, with its staff of special- 
ists in individual industries, will naturally be in a good 
position to deal with such matters. The small local bank, 
however, with its staff required to follow conditions simul- 
taneously in a great number of lines, may well be much less 
favorably situated than are the credit departments of 
houses in particular industries. Especially is this point of 
importance because of the significance frequently attached 
to having the local bank measure the credit, as will be indi- 
cated below. The bank, however, in any case has a specific 
advantage in that it is a disinterested party, and as such 
will be free from the natural bias of the seller to increase 
as much as possible the credit granted, in order to stimulate 
sales. 

Checking of Credit by the Local Bank. — A fur- 
ther problem to be considered is the location of the 
agency measuring the credit, or, as it is often called, the 
location of the financing. This involves a comparison of 

1 Agger, "Trade Acceptances Versus Bankers' Acceptances. ' ' 



162 THE MECHANISM OF COMMERCIAL CREDIT 

the relative merits of the buyer's local bank and of the 
seller. The argument in favor of the local bank proceeds 
along two lines. First, attention is given to what are 
regarded as fundamental economic factors. Attention is 
turned from recipients and grantors of credit to what is 
conceived to be the ultimate purpose of commercial credit. 
This, it is said, is to finance the flow of commodities from 
producer to consumer. The final test of commercial credit 
in any given industry is therefore consumer's demand for 
the commodity in question. This, it is held, can really 
only be ascertained locally, and the local bank is the proper 
agency for this purpose. It knows its local needs better 
than any outsider. Hence it should measure credit. 2 

The second line of argument considers recipients and 
grantors of credit. Attention is called to the size of the 
country, and the distance which often intervenes between 
buyer and seller. This, it is said, makes it difficult for 
small sellers to obtain accurate and reliable data on credit 
and market conditions, so that they actually sell to un- 
known buyers in unknown markets. Local measurement of 
credit is preferable in such eases, and should be performed, 
it is held, by the local bank. 

Consider these two arguments in turn. The first thing 
to note is the restricted applicability of the argument for 
checking the credit at the point of consumption. It relates 
only to credit extended to retailers of goods intended for 
everyday use. Articles such as machinery, which are used 
by the buyer as fixed capital goods, are generally sold by 
the manufacturer direct to the user. Either may be located 

* Local financing is also advocated for another reason. It is said 
that goods should be financed at the point where they are located, in 
order that proper supervision of the basis of the credit may be ob- 
tained. This cannot be had, it is claimed, where a seller in one place 
.by selling on time grants credit to a buyer located elsewhere, who 
holds the goods. If the community needs more funds than it itself 
can supply, they should be obtained by its banks, and not by its 
business houses. 



NET-TERMS SYSTEM— CREDIT ASPECTS 163 

at any place whatsoever, and the question of local retailing 
does not enter. Furthermore, in the case of ordinary goods, 
only the test of anticipated demand by retailers and ulti- 
mately by consumers, can be applied to manufacturers and 
wholesalers who are found in intermediate stages of the 
economic process, instead of in the last stage, as is the 
retailer. The manufacturer's or wholesaler's local bank 
certainly cannot be said to be in an especially favorable 
situation, by virtue of its location, for knowing what the 
demand for his goods will be in the entire territory he 
covers. Yet provision must be made for checking the manu- 
facturer 's and wholesaler 's credit and operations ; no credit 
test can be deferred until the goods are on the point of 
being consumed. In other words, analysis of fundamental 
factors needs to be supplemented, in any event, by analysis 
of the actual credit mechanism which exists — the credit 
recipients and grantors throughout the economic process. 
In fact, in the entire process of credit analysis, primary 
attention must be given to this credit mechanism. The 
more abstract analysis serves rather as a supplement than 
as a substitute. This throws us back upon the type of 
analysis made on page 161. The relative status of seller, 
buyer and bank must be considered. In doing this, gen- 
eralization is of little aid. For example, in a general way, 
the bank is in a better position to measure local consump- 
tion of goods, as well as the buyer's net worth and general 
solvency. On the other hand, the seller is in a better posi- 
tion to judge the buyer's business methods and operations. 
In short, there is little clear-cut advantage on the side of 
either seller or local bank. Detailed analysis is required. 
The need for this is borne out by the fact that the other 
arguments in favor of local checking of credit are valid 
only under specified conditions. The point made in the 
footnote on page 162 that goods should be financed at the 
point where they are located, applies only in the case of 



164 THE MECHANISM OF COMMEBCIAL CREDIT 

retailers, and certainly cannot be held to relate to large 
firms floating their paper in the open market. Moreover, 
referring to the second line of argument given on that page, 
it should not be difficult for well-organized firms covering 
intensively a certain district, to obtain data on credit and 
market conditions, and this would appear to be a serious 
handicap only to small sellers whose energies were scat- 
tered over a wide territory. 

Analysis of Types of Industries. — Actual condi- 
tions vary greatly in different industries. This detailed 
analysis, therefore, should take the form of examin- 
ing more closely the specific conditions which may be found 
on the industrial side. Difficulty in measuring credit arises 
in connection with small buyers, especially if located at 
points far removed from the seller. This, on the one hand, 
is a problem of obtaining credit and market information, 
and on the other, a problem of the degree of risk involved 
in credit relations with the buyers in the industry in ques- 
tion. In certain lines, such as jewelry and furs, the credit 
risk is great, and these call for different treatment than 
do less competitive lines having buyers whose standing on 
the whole is better. For this reason, it will be well to 
classify industries further according to the general status 
of buyers and sellers. In this four-fold classification, the 
words poor and small are used interchangeably to denote 
the less desirable credit risks. 

1. Poor seller — poor buyer 

2. " " —good " 

3. Good seller — good buyer 

4. " " —poor " 

Each of these cases should be analyzed separately in turn, 
as each requires distinctive treatment. Moreover, under 
the system now found in the United States, attempt is 
specifically made to treat each group according to its par- 



NET-TERMS SYSTEM— CREDIT ASPECTS 165 

ticular requirements, and to adapt the methods of credit 
measurement to the actual needs of the case. The poor 
seller is presumably ill-informed and therefore, on the 
whole, incompetent to attend satisfactorily to credit meas- 
urement. In case 1, it is well, in addition z because of the 
fact that the buyer is also poor, to have as much of the 
credit as possible checked at once by the bank, and hence 
a cash discount is desirable. Where the buyer is good, 
however, as in case 2, a cash discount is also to be favored, 
but on somewhat different grounds. Cash payment and 
hence shift of the credit period from between buyer and 
seller to between buyer and bank, is desirable in some lines, 
in order to enable a seller who is not in a position to attend 
to extension of credit, to relieve himself of the task. Fur- 
thermore, from the point of view of economy it is desirable 
to have the better party to a transaction, in this case the 
buyer, apply directly to the bank, instead of having a larger 
number of weaker sellers do so. This point was fully dis- 
cussed in Chapter III, where the case of sales of agri- 
cultural produce, with their disproportion in economic 
strength between buyer and seller, was cited. 

Where both parties are good, as in case 3, it is really 
immaterial whether the bank or the seller measures the 
credit. In such lines, however, cash discounts often tend 
towards a minimum, or are eliminated, while the net terms 
themselves in many cases are short. Finally, where buyers 
are poor, but sellers are good, as in case 4, it may never- 
theless be desirable to employ a cash discount in order to 
reduce the credit work. Especially will this be true in some 
lines, such as the wholesale hardware business, where those 
who discount their bills, those who pay promptly at the 
net maturity and those who run past due, are constantly 
changing and overlapping, so that at time of shipment it is 
not known positively to which class the customer will be- 
long at time of payment. Moreover, the generalization may 



166 THE MECHANISM OF COMMERCIAL CREDIT 

safely be made, that in actual practice the longer the net 
terms and the greater accordingly the risk, other things 
being equal, the more certain there is to be a cash discount 
quoted. 

These considerations apply, of course, to individual eases 
within any given industry, as well as to entire industries 
as a whole. But the important point for our purpose is the 
fact that under the existing system in the United States, 
attempt is specifically made to vary the manner of credit 
measurement and finance according to the needs of the par- 
ticular situation. This represents a decided step in 
advance, and we must conclude that from the point of view 
of the agency which measures the credit, no general net- 
terms system would be desirable, any more than would a 
system calling exclusively for cash payments between buyer 
and seller. 

Method of Credit Measurement by the Bank. — It is 
often assumed that the method of credit measurement em- 
ployed by the bank varies according to the system of 
commercial credit and finance which is employed. In last 
analysis, the bank supplies the funds which are obtained 
by buyers of merchandise, either directly, or else indi- 
rectly through advancing them to sellers who in turn carry 
buyers. Our second question in contrasting the net-terms 
and the cash-discount systems, therefore, relates to the 
methods which the bank employs in measuring credit when 
it is engaged in this process. Under the cash-discount 
system, those buyers who take the discount borrow directly 
from the bank, receiving a line of credit from it on the 
basis of their general position. For those accounts which 
do not take the discount, and in cases where net terms 
exclusively are used, the seller first measures the buyer's 
credit, and this is not rechecked or considered by the bank 
to any great extent unless the buyer's name is notably 
stronger than the seller's. The bank is also dependent 



NET-TERMS SYSTEM— CREDIT ASPECTS 167 

chiefly upon the seller for information as to the buyer. 
Where the credit is embodied in a note or trade acceptance, 
much greater.consideration is naturally possible than where 
it remains unembodied in an open account. 

In current discussion it is often stressed that the trade 
acceptance is tied to a specific transaction, and this would 
of course be true of all the receivables were a net terms 
system alone employed. It is held that this fact makes 
possible a different basis for and method of credit measure- 
ment. While there may be some tendency in this direction, 
the use of the net-terms system, whatever the form of the 
receivables, does not specifically call for a particular system 
of credit measurement. The seller may hold the receivables 
himself and borrow from the bank on the basis of his gen- 
eral position under the line-of-credit system, in the same 
manner as does the buyer who wishes to take a cash dis- 
count. Moreover, at the present time the customary prac- 
tice for the bank is actually to fix a line of credit for the 
seller who presents receivables, just as if he did not present 
them. 

This fact means that, when taken alone, the specific 
transaction affords an inadequate basis for credit measure- 
ment. It is necessary under any system of credit extension 
to record the total amount of credit which each individual 
receives, in order to insure that the amount is not excessive. 
A record of this kind is already provided where a line-of- 
credit-system is used, and would have to be specially kept, 
were attempt made to use the specific transaction system. 
In this case the line-of-credit plan would serve as an 
adjunct to the specific transaction method, and a two-fold 
system would be required. 

Furthermore, it should be remembered that the bank 
really loans to a buyer of goods. The liquidating power 
with respect to the bank's advance is furnished by a future 
transaction or series of transactions, and not by the past 



168 THE MECHANISM OF COMMERCIAL CREDIT 

transaction. Either the buyer must successfully resell the 
goods in question, or else the seller must successfully com- 
plete the operations which he undertakes with the funds he 
receives from the bank when he in effect passes the receiv- 
ables on to it. If both these operations fail, the security 
afforded by the past transaction to which the receivables 
in question specifically relate, falls to the ground. Further 
knowledge is required than is afforded by the mere receiv- 
able. This is available under the line-of-credit system, 
with the analysis which it undertakes of the general posi- 
tion of the applicant for credit. 

Finally, the line-of-credit system is more economical. It 
represents an attempt to apply the economies of large scale 
operation to credit measurement by banks. 3 Transactions 
are grouped, and an entire series is passed on by the bank 
at once, instead of each individually or a few together. 
Moreover, the unit considered is the individual firm, and 
the whole series of its transactions, both purchases and 
sales, is passed upon en Hoc. The bank practically con- 
siders the totality of the firm's operations, and the inter- 
play of both purchases and sales upon its general standing. 
While the bank in any event mediates between buyers and 
sellers, under the line-of-credit system, it measures the 
credit by .taking its position firmly within a given stage 
of the economic process, instead of considering specific 
goods as they move from one stage to another. An efficient 
and more economical method of credit measurement is 
afforded. The losses under it on the whole are not sufficient 
to require that it be generally supplemented by the specific 
transaction method, and that the two-fold system called for 
where the latter is used, be employed. At best, the two- 
fold system may be desirable in the case of poor sellers, 
^providing further knowledge of their operations. 

3 See the writer's Some Aspects of Banking Theory (New York, 
1920), Chap. iv. 



NET-TERMS SYSTEM— CREDIT ASPECTS 169 

Several attempts have been made, notably in the Jenks 
Bill, to combine the specific transaction method, making 
special provision for accurate certification of the character 
of the merchandise, with measurement by the buyer 's local 
bank. The latter then measures the credit, and finances 
the transaction. In other words, the buyer borrows in 
order to take the cash discount, but does so on a different 
form of paper. By thus introducing the local bank to 
measure the credit, it is desired to obtain a better check 
upon the buyer through the additional use of the line-of- 
credit system, the two methods of credit measurement then 
supplementing each other. 4 It has just been concluded that 
this combination of the two methods is unnecessary as a 
general rule, and in the case of the Jenks Bill the conclu- 
sion would be re-enforced by the complicated nature of the 
instrument itself. 

Collection of Accounts. — The above discussion re- 
lates to the agencies and methods whereby credit is 
measured. It is a totally different matter when the collec- 
tion of accounts promptly at the due date is considered. 
Here the question is: what form shall the extension of 
credit represented by the net terms take ? Shall it be em- 
bodied, in the form of note or trade acceptance, or shall 
it be unembodied, in the form of the open account? In 
discussing this problem, we waive the question whether or 
not credit instruments used for this purpose represent the 
best paper, and consider merely, which is the best way to 
get accounts paid promptly at maturity. For this purpose, 
the trade acceptance may be used satisfactorily in con- 
junction with the cash discount. 

It is often stated by trade-acceptance advocates (and the 
same in fact would be true of the note) that the acceptance 

4 As well as to have the local bank judge the consumptive powers 
of the community, and in this way the soundness of the credit granted 
the retailer, which has been discussed above. 



170 THE MECHANISM OF COMMERCIAL CREDIT 

gives the seller a hold on the buyer, especially when the 
seller passes the acceptance through a bank, either by dis- 
count or by turning it over for collection. Accounts are 
therefore settled more promptly where it is used than where 
an open account is employed. In fact, it has been estimated 
that 90 per cent or more of all trade acceptances now in 
use are employed for this purpose. The further advantage 
is claimed that, as this method results in prompter collec- 
tions, credit conditions as a whole are thereby improved. 

It will be generally agreed that^it is desirable to use 
embodied credit for certain buyers, in place of the open 
account. But, if it accomplishes such beneficial results, 
might it not be well to go one step further and use it for 
all accounts which take the net terms? Trade-acceptance 
advocates frequently state that the open account is so often 
abused as to lead it to break down under its own weight. 
Mr. R. H. Treman, for example, r has indicted the system in 
the hardware business as follows : 5 

Among manufacturers . . . the reports show that when the 
bills are discounted, instead of being paid in 10 days, they have 
averaged 15 days, and for those who take the option of the 
60-day credit period, the average payment is in from 75 to 80 
days, and 10 per cent or more of customers take 90 days or 
more. 

As to jobbers (wholesale distributors), the reports show that 
throughout the country generally from 40 to 50 per cent of buyers 
discount their bills within 15 days after purchase, while of 
those who take the 60-day option from 25 to 30 per cent pay 
"promptly," or within one month following the 60-day maturity. 
Of the remaining 20 per cent, only about one-half pay in the 
period between 3 and .4 months after purchase while the other 
half pay in from 4 to 6 months, or never, notwithstanding that the 
terms of sale agreed upon were for a credit of only 60 days. 



6 Address at 1916 Convention of the National Hardware Associa- 
tion, reproduced in "Trade Acceptances, What They Are and How 
They Are Used," October 1, 1919, pp. 23-24. 



NET-TERMS SYSTEM— CREDIT ASPECTS 171 

The data presented in Part III, however, do not paint 
so black a picture. Moreover, the trade acceptance is not 
an unmixed blessing. It is more cumbersome to handle 
than the open account, and involves considerable labor. 
Furthermore, it is a mistake to believe that the nature of 
the underlying credit can be greatly improved by its use. 
The primary factor in the problem is the individual who 
receives the credit, and the instrument which evidences it 
is only secondary. A greater degree of discrimination 
would therefore seem to be called for. In fact, under the 
system now in use, an attempt is made to distinguish more 
carefully. This is done in two ways. In certain lines, 
three classes of buyers are noted: (1) those who discount 
their bills; (2) those who buy on open account; and (3) 
those with whom a note or trade acceptance is used. The 
poorer buyers, or those who tend to run past due, are 
required to use embodied credit, while the remainder who 
take the net terms use the open account. On the other 
hand, buyers in general are notably weak in certain lines, 
and all buyers taking the net terms in these lines are re- 
quired to use embodied credit. The two cases just sketched 
represent a more careful attempt at adjustment to the needs 
of the present situation than does the universal use of 
embodied credit for those who take the net terms, and one 
which appears better adapted to modern conditions. 

The same indictment is frequently made against the cash 
discount as against the open account. That abuse is not 
flagrant in all cases is shown by the following statement of 
Mr. W. M. Bonham, of Knoxville, Tennessee, concerning 
the situation of his own firm in the wholesale hardware 
industry : 6 

We recently kept a careful tab over a period of 20 days of 
those who discounted after the terms expired. The results showed : 

6 <f Terms of Sale in the Hardware Business," Bulletin of the Na- 
tional Association of Credit Men, September, 1919, p. 837. 



172 THE MECHANISM OF COMMERCIAL CREDIT 

that 46 per cent of the payments were discounted; the amount 
discounted was 57 per cent of the total amount received; that 
90.2 per cent discounted according- to discount terms. And among 
the remaining 9.8 per cent there were very few cases of flagrant 
neglect of terms. 

The relatively limited extent to which such abuse exists 
does not appear sufficient to offset the services of the cash 
discount indicated earlier in the chapter. 



CHAPTER X 

THE NET-TERMS SYSTEM VERSUS THE CASH-DISCOUNT SYSTEM 
— SOCIAL AND BANKING ASPECTS 

Effects upon Business Practice. — Trade acceptance ad- 
vocates often not only claim advantages for their instru- 
ment from a credit point of view, but also contend that its 
introduction would foster sounder business practice and 
improve commercial morality. On the other hand, advo- 
cates of the cash-discount system not only deny the validity 
of these claims, but themselves raise certain counter claims. 
The points in this controversy relate specifically to em- 
bodied as contrasted with unembodied credit, and thus 
involve the question, what should be the form of the credit 
represented by the net terms? 

It is claimed that the use of embodied credit, whether 
trade acceptance or note, makes a buyer realize his obliga- 
tion to a greater extent. Hence he will be more cautious 
about incurring indebtedness, and will refrain from over- 
buying, at the same time that he avoids over r extending 
credit to his customers and is careful to collect more 
promptly from them. As a result, the merchandising sys- 
tem is improved, and is placed upon a sounder basis. 
These points are applicable primarily to the weaker buyer 
who must take the net terms, and appear more or less 
valid in such cases. On the other hand, however, it is 
stated that credit is made more liberal under the trade- 
acceptance system, as will be seen below, and the seller may 
also feel that he has greater security. Due to these two fac- 
tors, he may put forth extra sales efforts which will offset 

173 



174 THE MECHANISM OF COMMERCIAL CREDIT 

the feeling of caution on the part of the buyer. Over a 
period of time, these two conflicting tendencies doubtless 
tend to reach a point of equilibrium, and little clear cut 
advantage appears on either side. 

It is further claimed that the use of embodied credit 
serves to close the transaction at once. The thought is that 
the note or trade acceptance gives finality and definiteness. 
It thus serves to avoid abuses of various kinds, such as re- 
turned goods, and to improve the general plane of com- 
mercial morality. But this raises two points. 

1. How far is it possible or even desirable to do this? 
It is of course desirable to have the conditions surrounding 
the transaction clearly understood by both parties. Finality 
is possible in so far as products are standardized, but with 
other products an opportunity must be given for such ad- 
justment and rectification as may be necessary. The seller 
should not be given leverage with respect to the buyer, but 
both should be placed on an even keel. Each party must 
have sufficient confidence In the honesty and uprightness 
of the other to render it possible to leave the transaction 
open in the manner indicated. Advance in commercial 
morality lies along the line of a better sense of square deal- 
ing on the part of both, rather than in any external aids. 
Whether the buyer gives a note or trade acceptance, which 
may be altered in the event of necessary adjustment, or 
leaves the amount run on open account, would appear to 
be of importance only in connection with those buyers 
taking the net terms who show themselves to be unscrupu- 
lous. 

2. What is meant by closing the transaction at once, 
and in what manner should this be done ? Advocates of the 
cash discount claim that it serves to close the transaction 
at once for as many accounts as possible. It furthermore 
does this and gives the seller cash without having him incur 
any liability, either contingent or direct, to the bank, such 



SOCIAL AND BANKING ASPECTS 175 

as would be the case if he himself were to rediscount paper 
with it or to borrow from it while he held the receivables. 
This of course gives a different interpretation to ' ' closing a 
transaction at once," stressing as the objective cash pay- 
ment as far as possible, which might be supplemented by 
embodied credit on the accounts taking the net terms. The 
fields in which such cash payment is desirable were already 
considered in the preceding chapter, and the two points 
of view are not in fundamental conflict. 

Composition of the Business Community. — Leave aside 
the form of the credit, and turn to the question whether 
or not a cash discount should be granted. This, as was 
seen in the preceding chapter, is a totally different matter. 
The indictment is often made of the cash discount system 
that the discount discriminates against the weak buyer 
with small capital, who is just starting in business and 
still has his spurs to win. Such buyers are penalized when 
they take the net terms, for the goods cost them more than 
they do well-established firms who are able to pay cash 
and take the discount. Were the cash discount abolished, 
and net terms alone quoted, all buyers would be placed on 
terms of equality, and the individual just starting in busi- 
ness would be given a greater chance of success. This 
raises many and varied questions of economic and social 
policy. What form of economic system is desired — one in 
which there are a large number of small independent busi- 
ness men, even if society as a whole may have to pay a 
higher price because of their inefficiency when they start 
in business, or one in which the business unit is allowed to 
develop to its point of maximum efficiency, and no effort is 
made to aid the small business man? When the acid test 
of actual experience is applied, the latter does not seem 
to have been very seriously handicapped in the United 
States, in spite of the prevalence of the cash-discount sys- 
tem for a number of decades. 



176 THE MECHANISM OF COMMERCIAL CREDIT 

Relation of the Borrower to the Bank.— The effects 
which the system of commercial credit has upon prices, and 
the relation of the system to banking, are really two sep- 
arate problems. In considering the latter question, how- 
ever, possible effects which different banking methods might 
have upon prices must be taken into account. It will 
therefore be well to introduce the question of prices at the 
appropriate point in the discussion of banking, and to 
plunge directly into banking now, instead of considering 
each question separately. 

Neither the net-terms system nor the cash-discount sys- 
tem necessarily implies a specific method of borrowing from 
the bank. In either case, borrowing may be upon a promis- 
sory note, either straight or endorsed, or upon the receiv- 
ables (to the extent that these exist in embodied form), 
either by rediscounting or by using them as collateral. It 
is generally held, however, that the use of the trade accept- 
ance creates a special incentive to borrow at the bank by 
means of it. This is implied in the statement of trade- 
acceptance advocates that it substitutes "live" for "dead" 
capital. This has served to call attention to the question 
of borrowing from banks in several different forms, and 
the dangers which may attend such a practice when several 
banks, and perhaps the open market in addition, are em- 
ployed by an individual firm. This is perfectly true with 
respect to the poorer credit risks, and serves to call atten- 
tion to the need for careful scrutiny of credit in such cases. 
It is not an argument against the same individual borrow- 
ing in several forms. 

Furthermore, the question has been raised, what effect 
has rediscounting upon the seller 's statement, and upon the 
line of credit which he receives from his bank? It has 
been said that the bank will loan dollar for dollar on trade 
acceptances, and by thus taking them at full value, will 
increase the borrowing capacity on these accounts, inas- 



SOCIAL AND BANKING ASPECTS 177 

much as they are not then figured in the 2 to 1 current 
ratio considered in determining the line of credit. This 
has been criticized by Mr. Bonham in the article cited 
above, as follows : 

If the bank is lending dollar for dollar on accounts receivable, 
as represented by trade acceptances, what would be the ratio for 
loans on his other quick assets, including merchandise stocks and 
past-due trade acceptances? 

To this might be added the fact that the borrower has 
also assumed a contingent liability in rediscounting the 
acceptances. On the other hand, the funds received from 
the bank would appear in the borrower's statement, first as 
cash and then probably as merchandise, and would thus 
result merely in changing one class of quick assets, namely 
receivables, into another class. No additional direct lia- 
bility would be incurred, and a contingent liability would 
merely be assumed. The latter would be the only way in 
which the credit standing of the borrower was weakened, 
and through which his line of credit should be affected. 

Automatic Elasticity of Volume of Commercial Paper. 
— The thought is often expressed by advocates of the trade 
acceptance that the instrument will be automatically elas- 
tic, so to speak. Inasmuch as it is created as the result of 
a specific transaction, it will fluctuate in volume in response 
to the needs of business. To the extent that these accept- 
ances are rediscounted with the bank, the amount of bank 
advances will also be automatically adjusted in this way. 
This in fact is true of receivables existing in the form of 
notes as well as of acceptances. The only advantage of 
the trade acceptance lies in the fact that it provides a 
distinctive form of paper to represent the extension of 
credit in this special manner, while the note may represent 
extension of credit for any one of a variety of purposes. 

Automatic elasticity of commercial paper concerns the 



178 THE MECHANISM OP COMMERCIAL CREDIT 

banking system as a whole. As such, it is entirely distinct 
from the question which was discussed in the previous 
chapter, namely, the specific transaction as a basis for 
credit measurement. The thought is that in this manner 
the banking system will be able to operate safely. The pro- 
ceeds of the promissory note may be used for speculation 
or for fixed investment, but the trade acceptance carries 
on its face evidence of the use which the buyer (who really 
receives the loan) is making of the funds. Moreover, there 
will be correspondence between the volume of bank credit 
and the volume of commodities exchanged, as evidenced by 
the volume of transactions shown in the receivables which 
are discounted. Commercial paper of this description pro- 
vides a superior basis for the issue of hand to hand cur- 
rency, the volume of which then also fluctuates in response 
to the needs of trade. Inflation is accordingly impossible, 
for bank credit based in this way upon commercial paper 
and fluctuating in amount with commercial and industrial 
requirements, cannot influence general prices. A great evil 
is therefore avoided. 

But this view has certain outstanding defects. Too much 
reliance is placed upon mere form, and not enough upon 
actual substance. While the amount of paper should be 
the same as the volume of transactions, there is no guaranty 
that the maturities will be adjusted to the actual length of 
time required by the buyer in each transaction. In fact, 
it was seen in Chapter VIII that during the war specu- 
lators in the textile lines bought and sold goods on terms 
calling for a trade acceptance, the maturity of which far 
exceeded the time required for their turnover. As a result, 
in some cases several pieces of paper came to be outstanding 
against the same merchandise. Obviously, inflation can be 
brought about in this manner, as well as by lack of corre- 
spondence with the volume of transactions. Abuse of the 
trade acceptance in this way leads to disappointment on 



SOCIAL AND BANKING ASPECTS 179 

the part of those who have paid attention to the claims 
made for the instrument, and who have come to expect 
that it shall operate automatically, instead of recognizing 
that the use made of any tool depends in last analysis upon 
the operator, and that he guides its destinies. 

Effects upon General Prices. — The facts just mentioned 
from Chapter VIII indicate that in actual practice the 
trade acceptance may serve to make credit easier. In fact, 
trade-acceptance advocates often point to a result of this 
kind as one of the desirable accomplishments of the system 
they propose. They believe that this will follow because 
of the greater degree of safety achieved in the general 
banking and financial situation. The trade acceptances and 
other receivables discounted will not be considered as part 
of the borrower's regular line of credit, but will constitute 
an addition to that line. Leaving aside the fact that the 
claim of easier credit because of greater safety has been 
answered in the negative in the previous discussion, the 
effect of easier credit would be an increase in prices. But 
Professor H. G. Moulton of the University of Chicago has 
pointed out that, assuming that general prices or the price 
level varies inversely as the quantity of currency, both 
money and bank checks, the increase in prices would tend 
to be general, and would serve merely to raise the price 
level as a whole. While this would be true on the average, 
different goods would be affected unequally, and dispro- 
portion as between the prices of different classes would 
result. 

Prices of Particular Goods. — This attempt to trace the 
effect upon prices of the trade-acceptance or net-terms 
system proceeds from what may be termed the currency 
side. Attempt has also been made to approach the question 
from the point of view of the cost of individual articles. 
This connection has been traced in several ways. It is said 
that risks are reduced and credit losses are less, so that 



180 THE MECHANISM OF COMMERCIAL CREDIT 

prices will be figured closer, and therefore will be lower. 
Inasmuch as the point would be more or less valid for all 
commodities, the prices of commodities in general would 
decrease. Again, it is claimed that safer banking methods 
would serve to reduce the rate of interest, and this in turn, 
as an element in the cost of goods, would tend to reduce 
prices, although but slightly. On the other hand, those 
who uphold the cash-discount system point to the great 
tendency to decrease in both profits and prices in the 
United States during the past 20 years. They also claim 
that the use of their system enables the merchant to turn 
his capital over more rapidly, but this of course would be 
accomplished as well through the immediate rediscount by 
him of receivables with the bank. 

Finally, the relation of the cash discount to the selling 
price of goods has been considered. Opponents of the 
cash discount claim that it is merely added to what is a 
basic price for the merchandise, and that it thus serves to 
raise the average price paid for the goods. Advocates, on 
the other hand, claim that in last analysis prices are fixed 
by general competitive conditions, and that it is impossible 
for a seller arbitrarily to add this amount when figuring 
the price of his goods. Theoretically, as was seen in Chap- 
ter V, the basic price should be somewhere between the 
cash discount price (as it may be termed) and the net price, 
the range between the two being determined by the current 
rate of interest, the cost of credit work and the bad debt 
loss. Under ideal competitive conditions, the actual price 
realized would tend toward this basic price, although at 
any one moment more or less discrepancy would naturally 
be found. In any event, however, the discount would not 
appear to be a serious factor in increasing the prices of 
goods. It merely tends to result in making the merchandise 
somewhat cheaper to the best accounts and somewhat dearer 
to the poorer accounts than under a net terms system. 



SOCIAL AND BANKING ASPECTS 181 

All in all, no clear cut effects upon prices necessarily 
appear to result from either the cash-discount system or 
the net-terms system. If credit were easier under the 
latter, the general price level would be higher, but in view 
of the analysis which has been made, it appears extremely 
doubtful whether credit would be easier in the long run. 
Similarly, neither system appears to exert special influence 
to either increase or decrease the prices of individual com- 
modities. The trade-acceptance system does not seem, on 
the whole, to result in greater safety, hence the arguments 
for a tendency to lowered prices based upon that premise 
fall to the ground. On the other hand, the cash discount 
does not seem to be a potent factor tending to increase the 
price of goods. In short, the two systems of credit appear 
to be neutral in so far as influence on prices is concerned. 
The Discount Market. — One question still remains : with 
which type of paper can the banking system operate most 
satisfactorily? Shall the basic type be single-name paper, 
or double-name paper of one description or another ? Par- 
ticularly is this question important in connection with that 
paper which circulates, so to speak, in the open discount 
market. Open-market paper must possess the highest de- 
gree of both safety and liquidity. It is in this connection 
that particular stress has been placed upon the fact that 
the trade acceptance bears two names. It is claimed that 
this results in paper much stronger than that bearing 
merely a single name, such as is found where a straight 
promissory note is used. But is the double-name feature 
actually of as great importance as is often claimed? The 
idea dates back to the classical writers on banking, who 
wrote, as Professor E. E. Agger has pointed out, in an era 
of free competition and small independent business. It 
assumed that both maker and acceptor were practically on 
the same credit level, so that the presence of the second 
name tended to double the security. But this is manifestly 



182 THE MECHANISM OF COMMERCIAL CREDIT 

not true of modern conditions. One party to a transaction 
frequently overshadows the other, and the second name 
adds strength only where it is better than the first. The 
stronger name governs the credit judgment passed upon 
the paper. 

Moreover, is a trade acceptance, or in fact any form of 
obligation of a business house, satisfactory from the point 
of view of the open market? Can judgment be quickly 
reached upon the paper of thousands of names, comprising 
the entire business community? This does not raise the 
question whether or not a seller can satisfactorily extend 
credit, but considers whether absolutely safe and stand- 
ardized paper, which shall be the best in existence, can be 
obtained in this manner. It is obvious that there is both 
too large an element of risk, and too great difficulty in 
arriving at a judgment as to the paper. For this purpose 
the guaranty of a well-known and responsible credit 
specialist is required. This may take the form either of a 
direct obligation of the specialist, such as the banker's 
acceptance, or of endorsement by him of the obligation of 
a business house. Furthermore, the ranks of the credit 
specialists may be by no means so broad as to include the 
entire banking community, but may comprise merely a 
select few instead. Where attempt is made to extend the 
ranks of the credit specialists too greatly, distinction comes 
to be made between them, and they are grouped into several 
classes of different degrees of standing. In the manner 
indicated, the paper appearing in the open market is 
standardized to the requisite degree, and enabled to circu- 
late as far as may be necessary. 

Conclusions. — In considering commercial-credit methods 
and the commercial-credit system, it is necessary to 
analyze carefully the several distinct conditions which are 
found, and the peculiar methods, forms of instruments, 
etc., which these call for. Analysis of this kind reveals the 



SOCIAL AND BANKING ASPECTS 183 

fact that the cash-discount system is specially adapted to 
certain conditions, and serves a useful purpose in connec- 
tion with them, while the net-terms system is peculiarly 
applicable under other conditions. Furthermore, when a 
survey is made of trade-acceptance development in the 
United States, a distinct tendency is found away from gen- 
eral and indiscriminate use of the instrument and toward 
careful consideration of its specific fields of use and the 
adaptation of it to these fields. An experimental process 
is going on, which recognizes that it is specially adapted to 
certain conditions, and endeavors to seek out these fields. 
Experience has demonstrated that its field of use is some- 
what different than had previously been stressed, and that 
it is of particular service in connection with the collection 
of accounts. Accordingly, instead of being in conflict with 
the present system of commercial credit in the United 
States, when properly analyzed, it fits into and becomes 
an integral part of that system. 

The campaign so earnestly waged by trade-acceptance 
advocates has served to call attention to commercial-credit 
problems, and to bring about careful analysis of them from 
every angle. A better understanding of them has been 
afforded. Not only have the technical aspects been thor- 
oughly considered, but their relation to banking and the 
banking system is now better understood. It is realized 
also that these problems cannot be considered in isolation, 
but that effort must be made to trace their broader rela- 
tion to and effect upon the entire economic system. If the 
trade acceptance movement had served no other purpose 
than merely to focus attention upon these questions, it 
would still have rendered worthy service to the cause of 
better American business practice. 

A final lesson that this study of trade acceptance prin- 
ciples teaches is that the fundamental factor in credit 
granting is the recipient of credit, and not the form in 



184 THE MECHANISM OF COMMERCIAL CREDIT 

which the credit is extended or the agency by which it is 
measured. The buyer of goods and his standing in last 
analysis is the final touchstone, and no means exists by 
which a second-rate credit risk can be magically trans- 
formed into a first-rate one. All external aids or devices, 
such as the use of embodied instead of unembodied credit, 
while they have their place, are merely auxiliary and do 
not radically alter the fundamental feature — the underly- 
ing credit risk. Too great reliance cannot be placed upon 
them, nor are they automatic or mechanical in their opera- 
tion. 



PABT III 
TEEMS NOW IN USE 



CHAPTER XI 

THE FOODSTUFFS INDUSTRIES 

Part III will deal with the actual terms which are in 
use in leading industries. Each chapter will treat a group 
of more or less related lines. The terms situation in each 
will be described, and will be prefaced with such data as 
to marketing and business conditions in the industry as 
seem pertinent. Although specific reference will only be 
made in certain outstanding cases to the factors discussed 
in Part I, their application will readily be perceived 
throughout the discussion. 

The present chapter deals with the foodstuffs industries. 1 
This includes a group of products, certain of which are 
articles of food in the strict sense of the term, such as 
meats, flour and canned goods, and certain of which 
are more in the nature of luxury items, such as con- 
fectionery and tobacco. In all of them a part, and in 
most the bulk, of the product passes from the hands 
of the manufacturer through those of the wholesale grocer. 
Accordingly his terms will be discussed after those of 
the manufacturers in the several lines from whom he pur- 
chases. 

Except for the general nature of the article, conditions 
in this group of industries are not similar. Extremely 
perishable goods tend to be sold directly by the manufac- 
turer to the retailer, while a considerable proportion of 

1 Acknowledgment is due Mr. Sylvan L. Stix, of Seeman Bros., 
Inc., New York, and Mr. B. D. Crane, Secretary, Reynolds-Davis 
Grocery Co., Inc., Fort Smith, Ark., for reading this chapter. 

187 



188 THE MECHANISM OF COMMERCIAL CEEDIT 

other more durable goods passes through the wholesaler's 
hands. The former are on almost a cash basis, while the 
task of carrying the latter is often shifted to the buyer. 
Carload or large sized shipments of articles such as meats, 
flour and canned fruits and vegetables, usually carry sight- 
or arrival-draft terms. These terms naturally occur chiefly 
on sales to wholesalers or large consumers, and sales to 
retailers in many cases call for longer time. On the whole, 
however, open account terms generally do not run over 
30 days, except for articles such as non-advertised brands of 
cigars and teas. Cash discounts are correspondingly small, 
and in many cases are not quoted. 

Meat Packing. 2 — The various classes of meats are largely 
sold direct by packers to retail dealers. It is estimated 
that at the present time about 90 per cent of the fresh 
meat marketed in the United States is sold either by branch 
houses of the packers or by packer representatives. Cured 
meats, however, are sold to wholesale grocers (who in turn 
sell to retailers) in some country districts where the 
volume of business is small. The same is true of canned 
meats, but it is estimated that 80 per cent of the business 
in them is nevertheless direct. Wholesale grocers in the 
southern states, located at points not accessible to packer 
house branches, buy assorted carloads of dry salt meats, 
canned meats and lard. The small percentage of whole- 
salers in the country as a whole is usually located at other 
than packing centers, and the general character of their 
business is very similar to that done by the branch houses 
of the larger packers. Those dealers who are located in 
the larger northern cities usually handle principally fresh 
meats, smoked meats and lard. 

Fresh meats are generally sold on a weekly basis, and 
in some cases collection for all deliveries during a given 

'Acknowledgment is due Mr. Frank D. Kock, Credit Manager, 
Armour and Co., for reading this section. 



THE FOODSTUFFS INDUSTRIES 189 

week is made by a specified day of the following week. 
Deviations from the regular terms, such as the use of terms 
of from 10 days to 30 days, are principally the result of 
competitive conditions. Cured meats, however, are sold 
to a considerable extent on longer time, usually 30 days. 
Dry salt, dry smoked and sweet pickled meats are almost 
universally sold on strictly net terms, whereas sugar-cured 
meats, that is, hams and bacon, are subject in some cases 
to a cash discount of % per cent for payment within 10 
days, although in practice buyers seldom take advantage 
of the discount. These terms also obtain for lard, as well 
as for canned meats, although some packers grant a higher 
discount, such as 1 per cent, on the latter. Some dealers 
who buy both perishable products and provisions try to 
withhold remittances on all products for 30 days, or to 
settle on a monthly basis. Packers endeavor to obtain 
either prompt weekly or semi-monthly settlement, for 
example, by the 20th on all invoices dated from the 1st to 
the 15th. 

In addition to this distinction according to the nature 
of the product, others are made according to the type of 
purchaser. Carload shipments are almost universally made 
against sight draft, bill of lading attached. Proximo terms, 
ranging from the 10th to the 25th, are at times employed 
in the case of sales (1) to municipal, state and govern- 
ment institutions; (2) to railroad, lumber and coal com- 
panies and cotton factors; and (3) to large general stores 
and wholesale grocers. The third group is easiest to con- 
trol and most amenable to pressure on collections, the sec- 
ond less so, and the first least. Complaint is made that, in 
certain cases, payment is not effected for 2 or 3 months 
or longer. Terms to the retailer are also adjusted to local 
conditions, and " pay-day" terms are found in certain 
places, such as railroad, steel mill and mining towns, where 
the retailer carries the worker from one pay day to the next, 



190 THE MECHANISM OF COMMERCIAL CREDIT 

and where the due dates of his bills are adjusted to the 
pay days, frequently being semi-monthly. 

Jobbers in the larger centers sometimes extend longer 
terms to retailers. They not infrequently grant 2 per cent 
10 days, net 60 days, as compared with maximum terms 
extended by packers of y 2 to 1 P er cen t 10 days, net 30 
days, and they often also employ proximo terms. How- 
ever, there is stated to be a tendency towards shorter 
terms. 

Canning. — Canned products may most conveniently be 
divided into fruits and vegetables, soups, milk and fish. 
Most canners are very small in size, confine themselves to 
one or two products, and are located near the source of 
the raw materials to be canned. A small number pack 
a general line of fruits and vegetables, while there are a 
few very large packers who pack or handle practically 
every class of canned goods. Sales are made largely to 
wholesale grocers. 

In 1911, committees representing the National Canners 
Association and the National Wholesale Grocers Associa- 
tion discussed the question of a uniform contract to apply 
to sales of canned fruits and vegetables by packers: The 
grocers submitted a contract calling for 2 per cent dis- 
count for sight draft with bill of lading attached, payable 
on arrival and prompt examination. This was acceptable 
to the canners, who agreed to favor its adoption at the 
meeting of the executive committee and at the annual con- 
vention. There have been a number of conferences since 
then, but no absolute uniformity of terms has prevailed in 
consequence. State associations of canners in several cases, 
such as Wisconsin and California, have recommended con- 
tracts for use by members. A study made several years 
ago states that the question of rates of discount has fre- 
quently been discussed at the conventions of such as- 
sociations, and that many canners have favored a lower 



THE FOODSTUFFS INDUSTRIES 191 

rate while many have also advocated shorter credit 
periods. 3 

The older terms which prevailed for many years in the 
canning industry were 1% per cent 10 days, net 60 days, 
except on the Pacific Coast, where the net terms were 
largely 30 days. During the past decade, however, whole- 
sale grocers have often urged packers to increase the dis- 
count. In consequence, a considerable number of packers 
began to allow a cash discount of 2 per cent in cases where 
a sight draft with bill of lading attached was used. The 
latter terms are frequently found in New York, Ohio and 
the middle western states included in Federal Reserve dis- 
trict No. 7, although in some instances the 2 per cent dis- 
count is allowed instead when payment is made on arrival 
of the shipment. As a result of this change in terms, three 
optional dates of payment are now granted by some 
packers: 2 per cent for payment of sight draft; 1% per 
cent for payment on arrival or within 3 days after arrival, 
or within 10 days from date of invoice ; and the usual net 
terms. 

Besides the increase in the discount, the only other gen- 
eral change in terms has been the shortening of the net 
period in many sections from 60 days to 30 days. Only 
in some localities, such as Maine and Colorado, have the 
former terms continued in use. In some sections a draft 
is used where a cash discount of 1% per cent 10 days is 
quoted, but certain packers use the draft only where buyers 
are unreliable. In some cases, discount terms only are 
quoted, and no net terms are specified. 

Each of the other principal classes of products has cer- 
tain regular terms. Canned soups are sold on terms of 
iy 2 per cent or 2 per cent 10 days, net 30 days. Several 

8 Report of the Federal Trade Commission on Canned Goods; Gen- 
eral Report on Canned Vegetables and Fruits, May 15, 1918, pp. 
82-83. 



192 THE MECHANISM OF COMMERCIAL CREDIT 

years ago one of the leading manufacturers increased the 
discount from V/ 2 per cent, and some manufacturers in- 
creased it in 1917, from 1 per cent, in response to constant 
requests from organizations representing the purchasers. 
Some Pacific Coast customers receive the discount for 
remittance within 3 days after arrival of the goods. Pre- 
serves, ketchup, sauces, pork and beans, etc., are generally 
sold upon terms of 1% per cent 10 days, net 30 days, 
although discounts of 1 per cent and 2 per cent are also 
used. An exception to these terms is found in the case 
of a leading manufacturer of these products, who elim- 
inated his cash discount about 1917, and now sells only on 
terms of net 30 days. 

Terms on condensed and evaporated milk are generally 

2 per cent 10 days, net 30 days. Prior to April, 1911, the 
discount was largely 1 per cent, the change being due in 
considerable measure to the efforts of the wholesale grocers. 

Terms on canned fish, especially salmon, are usually 1% 
per cent 10 days, net 30 days. Southern California packers 
of tuna and sardines have the same terms, except that they 
use a sight draft with documents attached, payable within 
15 days from date and provide that if the shipment arrives 
prior to the maturity date, payment shall be made within 

3 business days after arrival. 4 Terms on Maine sardines 
are 1% per cent 10 days, net 60 days, while some minced 
razor clam packers on the north Pacific Coast grant a 2 
per cent discount, although most allow only iy 2 per cent. 
It will be seen that the terms on canned fish are thus sub- 
stantially similar to those prevailing for the other canned 
products in each locality. 

Flour Milling. 5 — Many of the large flour mills maintain 

4 These terms are similar in large measure to those previously 
adopted by the Canners' League of California, and in effect prior 
to March, 1918. 

6 Acknowledgment is due Mr. J. H. Mulliken, of Washburn-Crosby 
Co., for reading this section. 



THE FOODSTUFFS INDUSTRIES 193 

branch offices in the important distributing centers to 
market their output to the retail grocery and baking trade. 
Several of the larger mills sell 30 per cent of their output 
in this way, the remainder going to jobbers and whole- 
sale grocers. On the other hand, the milling process is 
simple, and the cost of milling equipment, on the whole, is 
comparatively small. Many small mills therefore have been 
constructed and are operated throughout the country, and, 
except in New England and a few Southern States, still 
supply a considerable part of the local demand. 

There are two corresponding types of terms, according 
to whether carload shipments are made or whether the 
flour is sold locally. Carload shipments are usually made 
against arrival draft, with order bill of lading attached, 
although sight draft is also used. In some cases, an arrival 
draft has been used for shipments to distant, and a sight 
draft for shipments to nearer, territory. Little use is 
made of time drafts, although these were sometimes used 
in the past in combination with a sight or arrival draft, so 
that, for example, the terms might call for payment of % 
the amount through arrival draft and the remainder 
through a 30-day draft. 

There has usually been a price differential, generally 
amounting to 5 cents per barrel, but sometimes 10 cents, 
for payment by sight draft instead of arrival draft. Often, 
however, the use of such a differential depends upon the 
distance for which shipment is made. One authority has 
stated that it is customary only for millers located west 
of the Mississippi River where cars are long in transit. 
A higher differential is employed in certain cases where 
a 30-day draft is used. In case of sales to state institu- 
tions and large corporations where remittance is made from 
the main office, as well as sales to firms located in places 
where there are no local banking facilities, the use of a 
draft is dispensed with and remittance upon arrival is 



194 THE MECHANISM OF COMMERCIAL CREDIT 

specified instead. In view of recent good transportation 
conditions, it is believed, however, that few mills now make 
a differential between sight and arrival draft terms. 

Mixed carloads of flour and feed are usually sold on 
arrival-draft terms, but for straight carloads of feed a 
sight draft is used. 

A different practice, however, is found in the case of 
less than carload shipments and local deliveries, either 
from millers or their branch houses. These sales are 
usually made on open account. Thirty days is frequently 
specified, although some variations are found, such as the 
use of 20-day terms, semi-monthly and weekly settlements, 
and proximo terms. In a few cases, C. 0. D. and net 10- 
day terms are also used. For sales of this kind, a cash 
discount is rarely given, but may amount to 1 or 2 per 
cent 10 days where net terms are 30 days. In place of a 
cash discount of this kind, the use of a price differential, 
such as 10 cents per barrel for payment within 10 days, 
is also reported. 

These two classes of terms — arrival draft and net 30 days 
— are generally used in the trade, in particular by the larger 
middle western millers. In several sections, however, cer- 
tain variations are found. In the Southeast, there is con- 
siderable use of both open account and trade acceptance, 
the latter showing relative gain since 1917, at the expense 
of the open account and arrival draft. Most of these ac- 
ceptances are for 30 days, and a small number for 60 days, 
but 90-day acceptances are very rare. In some cases, at- 
tempt is made to obtain an increased price, ranging from 
10 to 20 cents per barrel, where acceptances are used. 
Local open accounts are generally collected twice, but 
sometimes only once a month, but open accounts in inter- 
state business generally run for 30 days. 

In Texas, the open-account system is largely used for 
carload shipments, which are mainly mixed cars, as well 



THE FOODSTUFFS INDUSTRIES 195 

as for less than carload lots. Carload shipments are esti- 
mated to comprise 80 per cent of the business. The 
majority of the accounts run for 30 days. Texas millers 
ascribe the origin of this system (instead of the arrival- 
draft system, which is in general use in other sections) in 
considerable measure to lack of capital on the part of the 
retail buyer, while subsequently highly competitive condi- 
tions have also operated to prevent attempts to substitute 
the draft. From September, 1917, to July, 1918, the busi- 
ness was on a cash basis, but the old custom has since been 
restored. 

In the Pacific Coast and inter-mountain territories, dis- 
tinction in terms is made, not between carload and less 
than carload shipments, but between inter-territory and 
"outside" shipments, that is, to territory east of the inter- 
mountain states. Sales to local territory are estimated 
to amount to 90 per cent of California, 75 per cent of 
Oregon, 100 per cent of Seattle, 25 per cent of Spokane 
and 25 per cent of Utah business. Sales to outside territory 
are largely made against arrival draft, although the sight 
draft is also used by California millers. Sales on open 
account, usually running 30 days, are confined almost en- 
tirely to local business. 

It has been stated that up to 4 years ago practically all 
flour in the Northwest was sold on open account, due to 
the necessity of the flour manufacturer financing the re- 
tailers. This was attributed to 

the country merchants being small and being required to carry 
ranchmen and logging concerns for larger amounts and longer 
periods than is necessary for the dealers in the middle west; to 
poorer roads in the country districts requiring larger accumula- 
tion of stocks for winter consumption; to seasonal weather condi- 
tions in Alaska requiring larger accumulation of stocks, and to 
the necessity of salmon canneries purchasing canning season's re- 
quirement of flour in spring and early summer to be transported 



196 THE MECHANISM OF COMMERCIAL CREDIT 

at the time other cannery supplies are provided for remote 
canneries along the coast here and in Alaska. 
During the last 2 years, however, acceptances have also 
been used, running for 30 days in the Oregon, Seattle and 
Spokane districts and not over 45 days .in Utah. In Oregon 
and Seattle, local sales are now generally handled by 
acceptances, but in California nearly all local sales are 
made on 30-day open account. In several of these dis- 
tricts, the use of a cash discount, such as \ per cent, for 
payment within 10 days after delivery, or the use of a 
price differential where arrival draft terms are employed, 
is reported. In addition to this local testimony, several 
middle western millers also report changes in terms which 
have taken place in the inter-mountain territory. It is 
stated that during the past several years arrival draft 
terms have been replacing the former 30 to 90-day open 
account terms on carload shipments to these sections. 

Sugar Refining. — Refiners sell refined sugar largely on 
terms of 2 per cent for payment within 7 days after arrival 
of shipment, but prior to 1911, the discount was 1 per cent. 
The eastern refiners first changed in April, while beet 
sugar refiners followed later in the year, the terms to apply 
to new-crop sugars. The change was due to representations 
from wholesale grocers, extending over a considerable 
period of time. This business had been considered un- 
profitable, and it was estimated at that time that it com- 
prised about 20 to 25 per cent of their total business. It 
was stated in 1910 that the gross return on it was not over 
3 per cent, as against an average cost of doing business of 
6 per cent. 6 

6 This estimate, however, is considerably less than figures obtained 
in a study made a number of years later. Total expense for 108 
firms, chiefly for the year 1916, ranged from 6.7 per cent of net 
sales to 13.74 per cent, 9.5 per cent being most common; for 145 
firms for 1918 from 6.15 per cent to 14.79 per cent, 9.1 per cent 
being most common; and for 159 firms for 1919 from 4.35 per cent to 
14.71 per cent, 9.1 per cent being most common. — Harvard University 
Bureau of Business Research, Bulletins No. 9, No. 14 and No. 19. 



THE F0OJ2&TIIFFS INOTSTKIES 197 

The only frequent departure from these terms is in the 
case of local deliveries by truck, where 10 days from date 
of delivery is generally given. 

Coffee, Tea and Spices. — Most coffee roasters, as well as 
spice grinders, import to a greater or lesser extent. Whole- 
sale grocers as a rule buy coffee and spices from the roasters 
and grinders, although a considerable number do their own 
roasting and some import these items as well. Practically 
all importers of spices also act as jobbers. Sales are made 
largely to grinders, who put up the product in small pack- 
ages, and to canning factories. Grinders sell largely to 
wholesale grocers, although they also make some sales to 
jobbers and retailers. 

Green coffee is largely sold on a 90-day basis, with a 
discount for anticipation at the rate of 8 per cent per 
annum, which amounts to a 2 per cent discount for cash. 
A considerable amount of coffee is also imported on a cost 
and freight basis. In this case a net price is quoted the 
purchaser at the foreign port of shipment on presentation 
of shipping documents under an irrevocable letter of credit 
previously issued. Small jobbing quantities, namely lots 
of less than 250 bags, almost invariably carry a 1 1/2 per 
cent discount. In some cases, full settlement is insisted 
upon in 30 days. Sales of roasted coffee to jobbers usually 
carry terms of 2 per cent 10 days, net 60 days, and sales 
by wholesalers to retailers, whether the coffee is in packages 
or in bulk, are generally made upon the same terms, al- 
though in recent years a considerable number of firms have 
reduced the 60-day terms to 30 days. It has been stated 
that "it is the general opinion of the trade to make the 
terms standard (both for tea and coffee) and the practice 
is 30 days net with a discount of 1 per cent." Several 
firms state that they use these terms. 

Terms on tea are longer and larger discounts are allowed 
than on coffee. Importers grant jobbers time running from 



198 THE MECHANISM OF COMMERCIAL CREDIT 

60 days to 4 months, large use being made of terms of 3 
per cent 10 days, net 4 months. Considerable business is 
also done on 3 per cent 30 days, and it has been stated that 
up to 1 or 2 years ago the amount sold on such terms was 
as great as that sold on 10 days' time. Sales by wholesalers 
to retailers also carry varying terms, the cash discount 
running from 2 to 5 per cent and net terms from 60 days 
to 4 months. Three per cent 30 days is often found, while 
some houses continue to give 4 per cent 10 days, net 4 
months, but the latter terms are confined largely to sales to 
small jobbers. Some instances of a shortening of terms are 
reported, such as, for example, to 2 per cent 10 days, net 
60 days. 

Sales on whole spices by importers for many years have 
carried terms of 1/2 per cent 7 days, net 30 days, pur- 
chasers customarily discounting their bills. The grinders, 
however, usually sell ground spices on terms of 1 per cent 
10 days, net 30 days, but in some cases they give a discount 
of 2 per cent. Whole spices on sales to the retail trade 
usually carry terms of 1 per cent 10 days, net 30 days. 

Confectionery. 7 — Manufacturers of candy sell both to 
wholesalers and retailers. There is a difference of opinion 
as to the relative proportion of sales to each class of pur- 
chasers. Some estimates place sales to wholesalers at 
slightly less than sales to retailers, while others believe that 
sales to wholesalers are far in excess. Bulk candies, packed 
in pails and barrels, are sold chiefly to wholesalers, but a 
considerable proportion of package goods, such as fancy 
chocolates, are sold direct to retailers. 

Terms to the wholesale trade are usually 2 per cent 10 
days, net 30 days. A very considerable proportion of 
business, however, is done on 60-day terms. It is stated 

7 Acknowledgment is due Mr. Walter E. Hughes, Secretary-Treas- 
urer, National Confectioners' Association of the United States, for 
reading this section. 



THE FOODSTUFFS INDUSTRIES 199 

that sales in some cases now carry a 15-day discount period, 
while most of such sales bear proximo terms. It is esti- 
mated that about 50 per cent of sales of the wholesalers, 
in general, are discounted, but in New York State, manu- 
facturers place the proportion at from 70 to 80 per cent. 

Manufacturers' terms to retailers are generally the same 
as those given to wholesalers. Manufacturers and whole- 
salers selling retailers in the Rocky Mountain and Pacific 
Coast States, about two or three years ago, began to give 
them a discount of only 1 per cent, but the old terms have 
again been restored. 

Wholesalers' terms to retailers are somewhat longer in 
certain cases than are terms given by manufacturers to 
wholesalers. Sixty days is stated to be frequent, although 
the terms are largely 1 per cent 10 days, net 30 days. Sev- 
eral variations are found. In some sections a 2 per cent 
discount is allowed, while in other sections a discount is 
granted for semi-monthly settlements when salesmen call. 

Tobacco Manufactures. 8 — There are two principal classes 
of tobacco products — cigars, and the so-called manufac- 
tured products, comprising cigarettes, snuff, chewing 
tobacco, plug, twist, etc. Several large manufacturers 
dominate the latter industry, and' well-advertised brands 
are the rule. In the case of cigars, however, the situation 
is different. Much greater difficulty has been experienced 
in adapting machinery to the manufacturing process, and 
there are over 1,100 cigar factories. A considerable number 
of cigars are, of course, sold under well-advertised brands, 
but this is by no means the rule in the industry. 

The terms in use reflect this situation. Terms on the 
manufactured products have been practically standard- 
ized for a long time at 2 per cent 10 days. These terms 
apply both to sales by manufacturers and sales by jobbers. 

8 Acknowledgment is due Mr. Charles Dushkind, Managing Director, 
Tobacco Merchants ' Association of the U. S., for reading this section. 



200 THE MECHANISM OF COMMERCIAL CREDIT 

Practically all dealers t?ke advantage of the cash discount ; 
supplies, with the exception of rural districts, are purchased 
from week to week, and in sales to the small trade the 
discount has already been deducted when quoting the price. 
On the other hand, terms with respect to cigars are of two 
kinds. "Well-advertised brands carry approximately the 
same terms as do cigarettes, namely, 2 per cent 10 days 
to 30 days. Recently some manufacturers who sell only 
to jobbers have come to a net 10-day basis. The other 
brands, however, carry longer terms and there is little 
standardization. Terms to the jobber vary from net 10 
days to net 30 days, with a cash discount of from 1 to 2 
per cent in certain cases, and the jobber generally takes the 
discount. Jobbers usually grant retailers longer terms. 

Wholesale Groceries. — Wholesale grocers handle a great 
variety of articles, and the business thus often differs con- 
siderably from house to house. In some of the large 
markets, such as New York and Chicago, there are manu- 
facturing jobbers who do, to a great extent, a national and 
semi-national business, and traders who sell staple goods 
practically for cash at cut prices, in addition to houses 
which do the usual wholesale grocery business. In the 
Middle West and West, houses are more or less generally 
of the last type. In these sections, moreover, less compe- 
tition is experienced from exclusive tea and coffee and other 
specialty jobbers than in the more thickly populated terri- 
tories. 

Organized activities of wholesale grocers with respect 
to terms of sale have taken a twofold direction — in connec- 
tion with their purchases and with their sales. In 1907, 
the year after it was founded, the National Wholesale Gro- 
cers ' Association created a Committee on Discounts, which 
numbered among its activities consultation with manufac- 
turers in an endeavor to obtain more favorable terms. The 
subsequent year a Standing Purchase Discount Committee 



THE FOODSTUFFS INDUSTRIES 201 

was created to carry on this work, the name being changed 
in 1914 to Discount for Cash Committee. The general aim 
throughout has been to obtain a cash discount of 2 per cent 
upon the articles purchased by the wholesale grocer. This 
has involved effort to increase discounts upon certain com- 
modities, and protest when manufacturers sought to 
decrease or eliminate discounts previously in effect, as well 
as effort to institute a discount for others previously sold 
upon net terms. In the instances remarked above in con- 
nection with various food products, of increase in discount 
as a result of representations from wholesale grocers, the 
latter were in general represented by the committee men- 
tioned above. Prominent among the commodities for which 
effort has been made to obtain increased discounts may be 
mentioned rice, canned goods, sugar, California dried fruits 
and nuts, beans, sirup and molasses, macaroni, etc. In 
order to obtain the larger discount, the grocer is willing 
to pay prior to arrival of the goods. The committee has 
frequently and strongly called attention to the necessity 
for prompt payment within the discount period. Grocers 
in large measure take advantage of the cash discounts of- 
fered on their purchases and it is generally held that the 
firm which does not do so is not in a position to make a net 
return on its investment, as net profits in many instances 
are stated to equal the amount of the cash discounts 
received. 

With reference to its construction of the term " discount 
for cash," the National Wholesale Grocers' Association 
states that "a discount for cash is regarded by the whole- 
sale grocer as a banking proposition or practice/ ' It 
considers that the 2 per cent discount commonly granted 
the wholesale grocer is not excessive as compared with dis- 
counts in certain other lines, and is fully justified by the 
advantages which it holds accrue to the grantor of the 
discount. It states that it points out these advantages, 



202 THE MECHANISM OF COMMERCIAL CREDIT 

" leaving it for the particular manufacturer to determine 
whether it would be to his own advantage and sound busi- 
ness policy to adopt the discount for cash as a part of his 
sales policy. . . . Among these advantages are the elim- 
ination of the credit risk and of the moral risk, not to 
mention the development and maintenance of a spirit of 
good will between the buyer and seller. In addition to the 
immediate use of the money, the advantages from the 
elimination of the credit and moral risks are perhaps the 
most evident considerations involved, obviating, as they 
do, the cost of a considerable amount of expensive credit 
machinery, which cost increases whenever credit terms are 
lengthened, and whenever the proportion of the entire 
business done upon a credit basis increases. It is held also 
that the practice is financially and economically sound, in 
that it releases capital for constructive work and makes it 
possible to increase output and turnover and thus reduce 
cost to the trade and the public." 

In connection with terms upon the products he sells, 
the activities of the wholesale grocer have again taken a 
twofold direction. He has considered both the cash dis- 
count and the net terms. The guiding principle in the 
former case has been to avoid as far as possible granting 
a larger discount than is received upon the commodity. 
In the latter case there has been a consistent effort to 
shorten terms, 1 per cent 10 days, net 30 days being the 
goal, as well as emphasis upon the need to insist upon 
prompt collections. The opposition of the wholesale grocer 
to the use of the trade acceptance is due in large measure 
to belief that terms would be lengthened through its use. 
Considerable attention has been directed to the matter 
of shorter terms during the past several years. At least 
12 state and district wholesale grocers' associations, located 
principally in the Middle West and West, now obtain from 
certain of their members monthly reports showing the per- 



THE FOODSTUFFS INDUSTRIES 203 

centage of outstandings, that is, accounts and notes 
receivable at the close of the month in question divided by 
sales during the month. The shortening of terms and 
increase jn promptness of collections are illustrated by the 
figures already given. 9 

During the years 1908-1910, inclusive, there existed a 
Sales Discount Committee of the National Wholesale Gro- 
cers' Association, which considered the question of terms 
upon the commodities sold. In the wholesale grocery line, 
the construction of a set of terms involves fixing several 
standard sets of cash discounts and net terms, and classify- 
ing thereunder the commodities handled, each commodity 
being assigned to one of the sets of terms. The matter was 
discussed at the 1918 convention, at which the committee 
presented a report favoring 1 per cent 10 days, net 30 days 
for the general line, with terms of 1 1/2 per cent 10 days, 
net 60 days for domestic canned goods, soap, coffee, ground 
spices, etc., and 3 per cent 10 days, net 4 months, for teas 
in original packages, while terms on tobacco manufactures 
were optional. The discussion which followed revealed 
considerable diversity in existing practice, such as employ- 
ment of a 15-day period in place of 10 days, due to use 
of salesmen calling on the trade about every 2 weeks in 
making collections, and non-adherence to the discount 
period, as well as in the "West large use of a 2 per cent 
discount upon items, such as canned goods, for which the 
report permitted 1 1/2 per -cent. Nevertheless, the com- 
mittee report recommending the employment of such terms 
was adopted. The report of the committee at the following 
convention showed considerable adherence to the classifi- 
cation, although the 1 1/2 per cent discount had not been 
adopted by a large territory in the Middle West and far 
West. While the desire appears to have been to have the 
terms adopted by the several state and district associations, 

9 P. 100, 



204 THE MECHANISM OF COMMERCIAL GEEDIT 

only two specific cases of endorsement were noted. This 
ended the activity of the National Association with respect 
to this matter. At the 1910 convention, the committee re- 
port called attention to the importance of the subject, and 
suggested that the wholesale grocers, each for himself, 
should see that sensible business methods were adopted as 
to discounts. Thereafter, the field was left entirely to the 
state and district associations. At least 12 of the latter, 
in particular in the Middle "West and West, have adopted 
standard classifications which were recommended for the 
use of members. This is ascribed by a leading authority 
largely to the competitive conditions noted in the opening 
paragraph of this section. It should also be stated that 
these associations are in large measure those which prepare 
reports of outstandings. 

The classifications are supposed in certain cases to rep- 
resent current practice, while in other cases desirable 
changes may be introduced, although not yet in current 
use. Changes have been made by a considerable number 
of these associations during the past several years, most 
frequent being the elimination of 60-day items. In some 
localities, terms are now considerably shorter than called 
for by the classification, although the latter has not been 
revised. In others there has been persistent effort to 
shorten terms, although no formal action has been taken. 
Among the associations which have prepared classifications, 
there is practically universal agreement upon general terms 
of 1 per cent 10 days, net 30 days for the majority of 
items. A conspicuous exception is southern California, 
where terms of 1 1/2 per cent 15 days, proximo, net 60 
days, prevail, the terms of 1 1/2 per cent 15 days, net 30 
days having been changed to 1 per cent 10 days, net 30 
days in northern California August 1, 1918. In other 
oases * ' proximo ' ' and semi-monthly terms are also specified, 
in particular for aggregate purchases, as well as in some 



THE FOODSTUFFS INDUSTRIES 205 

cases 1 1/2 per cent* discount and in other cases a 15-day 
discount period. In one instance distinction is made be- 
tween city and country sales, semi-monthly settlement with 

1 per cent discount prevailing for the former, the regular 
terms of 1 per cent 10 days, net 30 days for the latter. 
In another case 1 1/2 per cent is given in cities upon all 
items for settlement either weekly or semi-monthly, such 
as the 5th and 20th, as compared with discounts of 1 and 2 
per cent, according to the item in question, for country 
sales. 

Turning to several of the more important items for which 
different terms are specified, domestic canned fruits and 
vegetables in certain sections carry a discount of 1 1/2 or 

2 per cent, although canned meats and soups and condensed 
milk carry only 1 per cent. "When sold in a larger way, 
and by the wholesaler more or less in competition with 
the canner, domestic canned fruits and vegetables ordi- 
narily carry a discount of 1 1/2 or 2 per cent. While 30 
days is generally the time within which bills are due net, 
60 days is specified in several cases, as well as a 1 per cent 
discount in others. A recent study extending over 5 years 
and covering over 1,000 retail grocers shows that over two- 
thirds of the retailers purchased their supply of canned 
fruits and vegetables entirely from wholesale grocers, while 
over 20 per cent additional so purchased at least part of 
their supply. 10 

Flour largely carries net 10 day terms, although in some 
cases 30 days is specified. The study above referred to 
shows, however, that a considerable amount of flour is 
purchased direct from manufacturers by retail grocers. 
Over 35 per cent of the latter bought all their flour in this 
manner, and of about one-third who did not make exclusive 
purchases from manufacturers, a large majority bought 
over one-half direct. .Sugar in considerable measure carries 

"Bulletin No. 13. 



206 THE MECHANISM OF COMMERCIAL CREDIT 

the general terms, although in some instances net 10 days 
and net 30 days occur. In Chicago 1 1/2 per cent 10 days is 
generally given (although not adopted) and in California 
an allowance per 100 pounds is made, amounting prior to 
August, 1917, to 15 cents 10 days in southern California 
and 25 cents 10 days in northern California, and since that 
time in southern California to 10 cents for payments by 
the 10th and 25th, in northern California to 10 cents 15 
days (changed August, 1918, to 10 days). The study above 
referred to showed that sugar is purchased mainly from 
wholesale grocers, over four-fifths of the retailers purchas- 
ing their sugar exclusively from that source. Meats and 
lard, a decreasing percentage of which is purchased from 
wholesale grocers, in general bear terms of net 10 days. 
However, net 30 days is given in some instances. 

Coffee usually carries a 2 per cent discount, while 60 
days instead of 30 days is the net period in certain cases. 
Forty-eight per cent of the retailers included in the above 
study purchased coffee exclusively from coffee roasters and 
specialty wholesalers. Tea carries a 2 per cent discount 
in many cases, although this is confined in some instances 
to package teas or teas in less than original amounts. Four 
per cent 10 days, net 4 months is sometimes given on teas 
in bulk or in original packages. According to the above 
study, 36 per cent of the retailers purchased tea only from 
the wholesale grocer, while 15 per cent so purchased a part 
of their requirements. Whole spices generally bear the 
1 'regular" terms, while ground spices carry instead a 2 
per cent discount. Tobacco, which over 60 per cent of the 
retailers bought exclusively from wholesale grocers, in 
practically all cases bears a 2 per cent discount, while net 
terms are 60 days in several cases. 

A considerable amount of information obtained shows 
that terms actually in effect correspond roughly to those 
prepared by the several associations. In certain sections a 



THE FOODSTUFFS INDUSTRIES 207 

considerable volume of business appears to be done on 
60-day terms, while in various parts of the South and West 
(specific instances being reported from Georgia, Arkansas 
and Idaho) notes are taken, and the retailer may be car- 
ried until maturity of crops in the fall. Terms as a rule 
granted in the South have been approaching closer and 
closer to those in effect in other parts of the country. In 
general, a large percentage, in many cases over 50 per 
cent, of the retail grocers take advantage of the cash dis- 
count. A good check upon data as to the length of terms 
actually in use is afforded by the statements of percentages 
of outstandings prepared by the several associations. While 
discounted accounts serve to reduce the percentages, an 
idea is given of the promptness with which collections are 
made. Returns for the several states vary considerably, but 
fall naturally into two general classes, those with average 
percentage ranging at present roughly from about 70 per 
cent to 100 per cent, and those with average percentage 
ranging at present roughly from 105 to 125 per cent or 
more. In the former group fall the middle western states, 
in particular those included in Federal Reserve district No. 
7; in the latter several eastern and southwestern states 
and California. This by no means implies homogeneity in 
terms within any given group. Wide variation is shown 
in the reports for the individual houses: the extreme per- 
centages in the California report for February, 1922, were 
72.2 and 186.0. It is in this connection that the policy of the 
house, the kind of trade it solicits, and the items which 
bulk largest in its business must be considered. Thus also 
weekly terms may in certain cases be made to restaurants, 
while the summer hotel trade may obtain a dating of several 
months on purchases of canned goods, etc. 



CHAPTER XII 

THE METAL INDUSTRIES 

The present chapter deals with a group of articles which, 
while closely related in their origins, are in very different 
forms. It includes both metals in their primary state, 
staple manufactures of these metals, such as steel rails 
and zinc sheets, and their more highly diversified manu- 
factures, such as hardware and machinery. All of them, 
however, are used for industrial rather than consumptive 
purposes in the ordinary sense of the term. Hardware 
alone provides a point of contact with the small purchaser. 

The articles may be grouped into three classes. Each class 
has its distinctive features and its distinctive terms. First 
are the metals and their staple manufactures. On the pri- 
mary forms, terms closely approximate cash, while they 
lengthen as the degree of manufacture increases and the 
articles are sold in smaller lots to weaker purchasers. Sec- 
ond are the highly manufactured articles of relatively small 
size, such as hardware, mill supplies and " machinery . ' ' 
Unlike the first class, they are largely distributed through 
jobbing channels, although dealers in " machinery " are 
manufacturers ' representatives rather than dealers in 
the strict sense. Net terms vary in length from 30 to 60 
days, except for "machinery," where the period is 30 
days. Third are the larger manufactures, such as ma- 
chinery proper, railway equipment and ships. These are 
generally sold on a cash basis, or what practically amounts 
to one, in that periodical payments are specified as the 
work progresses. At times, credit is given, and several 

208 



THE METAL INDUSTRIES 209 

notes with varying maturities may be used. In such eases, 
it is usual for the selling manufacturer to retain title 
and use a chattel mortgage, conditional sale or lease 
agreement. 

Iron and Steel. 1 — The general organization of the iron 
and steel industry is well known. Many large firms exist 
which manufacture a great variety of products for the 
market, and themselves produce the pig iron and semi- 
finished steel products out of which they make the more 
highly manufactured articles. Terms in general have been 
in effect for a considerable number of years and substantial 
uniformity in terms now exists. Prior to 1900, which date 
may be taken as the beginning of the movement towards 
consolidation in the industry, terms were considerably 
more irregular and were often adapted to meet the special 
needs of the customer, extended time, such as from 4 to 8 
months, with correspondingly high cash discounts, being 
frequently given for certain classes of products. 

In considering the terms now in use, it should be noted 
that broadly speaking the cash discount is greater for the 
more highly finished products, which are sold both in 
smaller lots and to different classes of purchasers than are 
the semi-finished products. It is stated, moreover, that 
the commodities bearing only a 1/2 per cent discount are 
sold on a close margin of profit. 

Pig iron, whether steel-making, such as basic and 
Bessemer, or foundry or forge, is sold upon terms of net 
30 days from date of invoice or average date of monthly 
shipments. The larger proportion of the steel-making pig 
iron, however, is transported in molten condition to steel 
works, and steel products during the initial stages of 
rolling, such as ingots, blooms, and slabs, are in large 

1 Acknowledgment is due Mr. T. H. Taylor, Assistant General Sales 
Agent, Ameriean Steel and Wire Co., and Mr. J. P. Bender, Credit 
Manager, Bethlehem Steel Co., for reading this section. 



210 THE MECHANISM OF COMMERCIAL CREDIT 

measure not commercial products. Terms for billets, 
blooms and slabs, into which, the ingot is rolled, are largely 
1/2 per cent 10 days, net 30 days. 

Terms for heavier rolled products differ. Standard rails 
are sold on terms of net 30 days and light rails on terms 
of 1/2 per cent 10 days, net 30 days, while the latter terms 
obtain also for structural shapes and plates. Standard 
shapes are sold to constructors of buildings and builders 
of bridges, ships, cars, etc., while plates are sold to the 
same group, as well as to manufacturers of boilers and 
tanks. Light-rolled products, such as merchant and sheet 
bars and wire rods, generally carry terms of 1/2 per cent 
10 days, net 30 days, and these terms have been in effect 
for many years. It is stated that about 1900, no discount 
was given on wire rods. Certain types of merchant bars 
are sold to hardware jobbers, but large quantities are also 
sold to manufacturers of agricultural implements, vehicles, 
etc., and some are further manufactured into bolts, nuts, 
spikes, etc. Sheet bars are rolled by purchasers into black 
sheets, used for roofing and making stovepipe, receptacles, 
etc., and into black plate used in the manufacture of tin 
plate. Wire rods provide the raw material for the wire and 
wire goods industry. 

Rivets (1/2 inch and larger in diameter) and spikes 
carry terms of 1/2 per cent 10 days, net 30 days; bolts, 
nuts, and rivets less than 1/2 inch in diameter, terms of 1 
per cent 10 days, net 30 days. Track bolts and specially 
designed bolts, however, carry in considerable measure 
terms of net 30 days, though the former in certain cases 
bear a cash discount of 1/2 per cent 10 days. The manu- 
facture of these products is relatively concentrated. There 
are not over 25 producers of bolts and nuts, of whom all 
but 3 or 4 now adhere to the terms given above. About 
1912, an unsuccessful effort was made to reduce the dis- 
count and net terms on this item from 2 per cent 10 days, 



THE METAL INDUSTRIES 211 

net 60 days, but a similar effort several years later 
succeeded. This was in spite of the strong resistance of 
the hardware jobbers, who, however, handle only a small 
part of the total output, the major part being sold direct 
by the manufacturers to industrial consumers. It is stated 
that prior to 1914 or 1915, the discount on rivets was 
generally 1 per cent. 

Wire products, including wire rope and smooth, barbed, 
and* twisted wire, nails, and *woven wire fence and netting, 
carry terms of 2 per cent 10 days, net 60 days. Similar 
terms obtain for welded tubes, pipe, and other welded 
tubular products. In the case of purchasers to whom fre- 
quent shipments are made, monthly payment is permitted, 
terms then being 2 per cent 10th proximo. Seamless tubes 
and other seamless products carry terms of 2 per cent 10 
days, net 30 days, although in the case of contracts for a 
considerable periodical supply of seamless cylinders the 
net terms are increased to 60 days. Sheets and tin mill 
products, including black sheets and tin plate, are sold on 
terms 2 per cent 10 days, net 30 days. These terms have 
been in effect for 12 to 15 years, prior terms having been 
respectively 2 per cent 10 days, net 60 days and 1 per cent 
10 days, net 30 days. 

Copper, Lead and Zinc. 2 — For the present purpose, the 
distinguishing characteristic of the markets for the non- 
ferrous metals in their primary forms may be considered 
to be the absence of standardization, both in marketing 
practice and in terms. A large speculative interest has 
always existed in copper and in zinc, particularly in the 
former. In lead, on the other hand, there is relative con- 
centration of production. The producing companies are 
only 12 in number, one of them produces 35 per cent or 
more of the total output, and "its policy is to conduct a 

2 Acknowledgment is due Mr. C. J. Trench, Editor, The American 
Metal Market, New York, for reading this section. 



212 THJB MECHANISM OF COMMERCIAL CREDIT 

business made stable by maintaining regular customers and 
prices as nearly constant as conditions permit." It is 
stated that only 5 per cent of pig lead finds its way into 
the hands of jobbers for resale. In copper and zinc, how- 
ever, the percentage so handled is much greater. Estimates 
place the figure for copper for 1919, at somewhere around 
20 per cent of the total output, and this is stated to have 
been larger than normal. A very much larger percentage 
of the output of zinc, estimated at from 50 to 60 per cent, 
passed through the hands of dealers at that time, but at 
present they are probably not handling over 20 per cent. 
In 1920, dealers handled a large portion of the export trade, 
but there has been virtually no export business for a year, 
and dealers' operations in the domestic market have also 
fallen considerably. The proportion handled by jobbers 
thus varies considerably from time to time. It is a well- 
known market fact that since 1919 the copper producers 
have been limiting strictly the amount sold to jobbers, in 
order, it is said, to avoid a repetition of the situation exist- 
ing at that time when the jobbing interests to whom sales 
had been freely made dominated the market. The general 
practice varies among the different producers, some of them 
pursuing the same policy as the lead companies. 

The effect of these factors upon terms may be summarized 
by stating that, strictly speaking, for these metals there 
are no ' ' regular ' ' terms, such as exist in many other lines. 
While producers prefer cash against documents, they en- 
deavor to meet the wishes of their customers, and, as a 
rule, are willing to sell on the terms preferred by the latter, 
provided payment is made within 30 days from date of 
shipment. 

Producers' terms on ingot copper vary. Instances found 
are cash against documents, cash on delivery, sight or 
arrival draft, 10, 20, or 30-day draft, and up to 30 days' 
open account. Formerly 30 days from arrival was also 



THE METAL INDUSTRIES 213 

given ; but this was changed, about the opening of 1920, to 
10 days from date of shipment if made from an eastern 
refinery and 30 days if made from a far western refinery. 
This eliminates the financing by the producer required 
under the earlier terms, also disputes as to what constitutes 
date of arrival, which were frequent. Prior to the war, a 
discount of 1/2 per cent 10 days was usually granted large 
consumers, net terms being 30 days, but this was largely 
eliminated during the war, copper being sold chiefly on a 
cash basis. Producers are again allowing large consumers 
30-day terms. 

Pig lead is sold by the larger producers on terms of 
cash on arrival at the buyer 's plant, a sight draft with bill 
of lading attached being used in most cases with instruc- 
tions to the bank to hold the draft awaiting the arrival of 
the shipment. A small percentage of sales call for cash 
in 10 or 15 days from date of shipment. 

The larger producers' terms on slab zinc are similar to 
those allowed on lead. Sales of prime western zinc during 
the early part of the war, when scarcity existed, were al- 
most wholly on sight draft. Cash on arrival or sight draft 
are, however, by no means exclusively employed. Terms in 
some cases vary from net 10 days to net 30 days from date 
of shipment, according to length of time required for 
delivery. It is stated that since the middle of 1917, when 
prime western zinc has been in free supply, leading con- 
sumers have been able to re-establish such terms. It may 
be noted that they by no means always involve a longer 
period than in the case of cash-on-arrival terms, as ship- 
ments from western centers to eastern consuming works 
are frequently 3, 4, or 5 weeks in transit. High-grade zinc, 
which is used extensively to make the better quality brass 
and for rolling sheets, largely carries a cash discount of 
1/2 per cent for payment within 10 days from date of 
shipment, or in some cases with sight or 10-day draft. In 



214 THE MECHANISM OF COMMERCIAL CREDIT 

special cases the terms to purchasers of high standing are 
made 1/2 per cent 10 days, net 30 days. There has been a 
movement during the last several years looking to the for- 
mulation of standard terms for the industry. 

Jobbers ' terms on copper and zinc are stated to be largely 
1/2 per cent 10 days, net 30 days, although on carload lots 
in competition with producers net cash on arrival may be 
specified. Pig lead is sold largely on terms of net 30 days. 

Terms on manufactures of the non-ferrous metals are 
not the same as on the metals themselves in their primary 
forms. Terms on brass and copper products, including 
rods, wire, sheet and tubing, are largely 1 per cent 10 days, 
net 30 days, the discount in some cases being given for 
semi-monthly settlements by the 5th and 20th. These terms 
have been in effect for many years. In certain cases the 
discount was reduced during the war to 1/2 per cent and 
in some cases later eliminated, although subsequently, in 
general, restored to the former figure of 1 per cent. 

Trade sheet lead and lead pipe carry terms of 2 per 
cent 10 days, net 30 days ; bar lead and solder carry terms 
of net 30 days; and chemical sheet lead and chemical lead 
pipe carry terms of 1 per cent 10 days, net 30 days. The 
first two classes of items are sold largely to jobbers of 
plumbing supplies and to plumbers, the last to the chemical 
trade. The difference in the discount is accounted for by 
the difference in size and credit standing of the purchaser. 
While a 1 per cent discount is sufficient inducement to the 
large concerns of first-class credit standing in the chemical 
trade to generally discount their purchases, it is insuffi- 
cient in case of jobbers of plumbing supplies and plumbers. 

Rolled zinc products are regularly sold on a cash basis, 
sight draft against bill of lading being used in many cases. 
A cash discount of 3 per cent is allowed. These terms have 
been in effect for many years. By far the larger part 
of these commodities is sold to jobbers as against con- 



THE METAL INDUSTRIES 215 

Burners, although the proportion varies considerably from 
month to month. 

Hardware. 3 — The hardware field is exceedingly complex. 
A large number of items are included under the term, and 
the limits are vague and ill-defined at points, merging into 
other lines. Hardware distributors have extended their 
activities to include related lines as well, automobile ac- 
cessories affording the latest instance, while some of the 
regular hardware items are handled by other merchants 
also. Within the recognized limits of the field itself, there 
is no standard classification of items into a number of types. 
In addition, the lines produced by the individual manu- 
facturers differ greatly. 

In order to clarify the discussion as far as possible, 
several of the classifications in actual use will be presented. 
The war service committee of the American Hardware 
Manufacturers' Association had the following sections: 

Wire goods and heavy hardware. 

Builders' hardware, metal ware, small castings and stampings. 

Cutlery. 

Hardware tools. 

Agricultural tools. 

General hardware. 

The internal organization of the individual hardware 
jobber, however, by no means follows the same lines. Fol- 
lowing are the lists of departments of two hardware 
jobbers. The number, of course, will vary with the size 
of the house. 

House No. 1 

Builders' hardware. 

Mechanics' tools. 

Brass goods, valves, pipe fittings. 

Steel bars, plates, sheets, light rails, etc. 

•Acknowledgment is due Mr. T. James Fernley, Secretary-Treas- 
urer, National Hardware Association, for reading this section. 



216 THE MECHANISM OF COMMERCIAL CREDIT 

Wrought pipe and boiler tubes. 

Cutlery, fishing taekle, 4 sporting goods, etc. 

Fire arms and ammunition. 

Nails, horseshoes, barbed wire, etc. 

Household goods, enameled, agate and tin ware, etc. 

House No. 2 
Auto accessories. 
Builders' hardware. 
Cutlery, watches, and clocks. 
Electrical supplies. 
Heating and plumbing. 
Heavy hardware. 
Mill, logging and agricultural. 
Mining and railway. 
Paint and glass. 
Saddlery and shoe findings. 
Sporting goods. 
Stoves and ranges. 
Tents and awnings. 
Tools. 
Toys and novelties. 

In the present discussion we shall consider first the 
general line of shelf hardware and then treat in succession 
the metals and heavy hardware, builders' hardware, and 
sporting goods. Automobile accessories and electrical sup- 
plies, a smaller portion of which products is distributed 
through the hardware jobbers than in the case of the lines 
just mentioned, will be treated separately later. The regu- 
lar distributive chain in the hardware industry comprises 
manufacturer, jobber, retailer, and consumer, but it is 
stated that in the Central West and on the Pacific Coast a 
greater proportion of goods is sold by jobbers to manufac- 
turing and other consumers not individuals than in the 
other sections. 

Shelf Hardware — Manufacturers' Terms. — Activities of 
the National Hardware Association with respect to terms 
of sale have dealt both with the purchases and with the 



THE METAL INDUSTRIES 217 

sales of hardware jobbers. Although in the 90 's the Amer- 
ican Hardware Manufacturers' Association gave much 
consideration to net 30-day terms, and some manufacturers 
adopted them, the strenuous objection on the part of the 
wholesalers resulted in the abandonment of the attempt to 
establish these terms, and the recognized terms upon which 
manufacturers sold continued for many years to be 2 
per cent 10 days, net 60 days. The officers of the jobbers' 
association have always displayed great interest in the 
maintenance of the discount, and have at once communi- 
cated with manufacturers who have announced a decrease 
in or discontinuance of the same. The reasons for the job- 
ber's advocacy of the cash discount, and the advantages 
claimed for it, are substantially similar to those put for- 
ward by the National Wholesale Grocers' Association, 
which were given in the preceding chapter. It is generally 
held that the discount is the source of a considerable part 
of the net profits of the jobber. The success of the work 
may be judged from the statement in the 1910 report of 
the secretary-treasurer that ' ' almost all manufacturers now 
admit that the usual and ordinary terms are 2 per cent 10 
days, net 60 days. ' ' From this time on a period of relative 
quiescence is noted, and the terms of 2 per cent 10 days, 
net 60 days, became established as the regular hardware 
terms. For several years correspondence with manufac- 
turers was relatively small and the work was confined 
largely to representing to members the undesirability of 
wrongfully deducting the discount when not paying within 
the 10-day discount period. 4 

4 Some evidence as to promptness with which collections are made 
by hardware manufacturers is afforded by the following data con- 
tained in a paper advocating the use of trade acceptances, read by 
Mr. E. H. Treman at the 1916 convention of the National Hardware 
Association, and reproduced on pages 23-24 of the pamphlet entitled 
1 ' Trade Acceptances, What They Are and How They Are Used, ' ' 
prepared for the American Acceptance Council and published October 
1, 1919: "The reports show that when the bills are discounted, 



218 THE MECHANISM OF COMMERCIAL CREDIT 

This period, however, was not of very long duration. A 
rather widespread movement among manufacturers became 
manifest several years later, in particular after the outbreak 
of the war, to either decrease or eliminate the discount. 
This may be ascribed both to the increase which occurred in 
the price of the various hardware articles, which accom- 
panied the increase in the cost of production, and to the ex- 
istence of a seller 's market. Strong opposition was aroused 
among the jobbers, the more so as their cost of doing busi- 
ness had been steadily mounting. At the 1916 convention of 
their association the resolution of 1899, favoring a cash dis- 
count of 2 per cent for payment within 10 days, was again 
read, and a similar resolution was passed. Both in 1916 and 
in the succeeding year the question was of prime impor- 
tance. In the latter year a committee of the jobbers was 
appointed to present the matter to the manufacturers' con- 
vention. At the same time jobbers were again urged to re- 
spect the discount period. With the passing of war condi- 
tions, the matter has gradually declined in importance, and 
in 1918 it was stated that "many of the manufacturers who 
changed their terms during the past year reinstated the dis- 
count. " At no time, however, did the majority of manufac- 
turers deviate from the regular terms. Deviation occurred 
more largely in lines where the bulk of the merchandise has 
been distributed through other than hardware channels, in 
particular where the bulk of the manufacturers' sales are 
to large industrial consumers. A prominent illustration is 
afforded in the case of bolts and nuts, as was mentioned 
above, also by explosives, where terms were recently 
changed to net 10 days. Several reliable estimates agree 
that at the present time about 80 per cent of hardware 
items are sold by manufacturers upon the regular terms. 

instead of being paid in 10 days, they have averaged 15 days, and 
for those who take the option of the 60-day credit period, the average 
payment is in from 75 to 80 days, and 10 per cent or more of 
customers take 90 days or more." 



THE METAL INDUSTRIES 219 

Some manufacturers grant net terms of only 30 days 
instead of 60 days. This fact, however, makes little dif- 
ference to the jobber, for he generally discounts his 
purchases. Yet it appears to be the only change which 
has been generally adopted in any of the distinctly hard- 
ware lines. Most manufacturers of seasonal goods have 
continued for many years to offer jobbers a dating on con- 
dition that they permit the manufacturer to ship the goods 
at his convenience. This is true of agricultural hand tools, 
where forks, hoes, rakes and cultivators carry March 1, 
corn hooks and knives September 1 and hay knives Novem- 
ber 1. Certain household goods are known as spring or 
fall items (for example, water coolers and oil cook stoves; 
and oil and wood heaters and stovepipes), and carry March 

1 and September 1 respectively. Furnaces, stoves and 
ranges generally carry September 1, although several years 
ago October 1 was given, and a spring dating of April 1. 

Shelf Hardware — Jobbers' Terms. — The regular terms 
of sale of hardware jobbers have been the same as those 
upon which their purchases are made, namely, 2 per cent 
10 days, net 60 days, but since 1919, there has been a 
movement to reduce the net period to 30 days. The Na- 
tional Hardware Association has considered the question 
at various times. Parallel with its work of urging all 
jobbers to respect the cash discount period, similar work 
was undertaken designed to bring the matter to the atten- 
tion of the retailer. In 1911, a special committee on cash 
discount was appointed with this particular function. 
From about 1912 on, emphasis began to be placed upon the 

2 per cent as a premium for prepayment, rather than as 
a discount Tor cash. The expression (which dates back at 
least to 1899) has been employed in the subsequent deal- 
ings with the manufacturers. The report of the cash 
discount committee, in 1912, stated that certain of the 
markets were badly demoralized on the question of the 



220 THE MECHANISM OF COMMERCIAL CREDIT 

enforcement of the cash discount period. Mr. R. H. 
Treman in the address delivered in 1916, to which refer- 
ence was made above, gives the following data : 

As to jobbers (wholesale distributors), the reports show that 
throughout the country generally from 40 to 50 per cent of buyers 
discount their bills within 15 days after purchase, while of 
those who take the 60-day option from 25 to 30 per cent pay 
"promptly," or within one month following the 60-day maturity. 
Of the remaining 20 per cent, only about one-half pay in the 
period between 3 and 4 months after purchase while the other 
half pay in from 4 to 6 months, or never, notwithstanding that 
the terms of sale agreed upon were for a credit of only 60 days. 

Variation was noted according to locality, jobbers on 
the Pacific Coast having 50 per cent of buyers discount 
their bills, 20 per cent pay in 75 days, and 30 per cent in 
from 3 to 4 months. In the rural districts the majority of 
retailers did not discount their bills, and averaged 90 days 
in place of the 60 days called for by the regular terms. In 
some cases interest-bearing notes for longer periods were 
taken by wholesalers. In connection with the respect of 
the discount period by retailers, attention was directed, in 
1916, to the fact that the order blank prepared by the 
retailers ' national association contained a clause calling for 
2 per cent on receipt of goods. 

The other problem confronting the jobber in connection 
with the cash discount has been the question of proximo 
terms. A growing tendency in this direction has been evi- 
dent, although there is no uniformity of praetice with 
respect to the matter. In certain cases semi-monthly set- 
tlement has been permitted, while in some cases it has 
been confined to city sales. In other sections, however, for 
example in Iowa, proximo terms are not favored. 

It will be evident from the data given above that the 
question of the enforcement of the net terms has been of 
equal importance with the enforcement of the cash discount 



THE METAL INDUSTRIES 221 

period. As a practical means to the former end, the col- 
lection of interest on overdue accounts has often been 
advocated, in particular by the cash discount committee in 
1911 and 1914., It should be noted that in certain sections 
at least considerable improvement in collections has been 
observed during the past several years, likewise an increase 
in the percentage of those taking the cash discount. 

Some interest has been manifested in the trade accept- 
ance during recent years, and the National Hardware 
Association has distributed considerable literature. As is 
the case in some other distributive lines, however, no wide- 
spread adoption of the acceptance is found, although it 
was stated in 1918 that quite a few houses, in particular 
in the South, had put into effect terms of 2 per cent 10 days, 
net 30 days or 60-day trade acceptance, and that " those 
who had tried acceptances were very much pleased with 
them." The matter had previously been discussed at the 
meetings of the Southern and Texas Associations, which 
adopted the terms mentioned. The general question of 
length of terms of sale has been discussed at various con- 
ventions of the National Association. In 1918 a resolution 
was introduced favoring uniform "terms of 2 per cent 
premium if cash is received within 10 days, or 1 per cent 
if received in 30 days, or 1 per cent if received before 
the 10th of the month for aggregate invoices of previous 
month, or net 60-day trade acceptance or bank note for the 
previous month's aggregate," and in the discussion which 
followed the suggestion was made that terms should be 
adopted not only by the State Associations, but by the 
National Association as well. It is stated that, during the 
year 1919, there was a tendency to shorten the net terms 
from 60 days to 30 days. 

To consider briefly now the actual terms in use in the 
several sections of the country. General employment of 
other than the regular terms is always found in certain 



222 THE MECHANISM OF COMMERCIAL CREDIT 

markets. At the present time a 2 per cent discount is reg- 
ularly given, even on items upon which the manufacturer 
allows only a lesser discount, with the exception, of course, 
of distinct lines, such as metals and heavy hardware. In 
certain sections where the net terms are 60 days, some 
jobbers have adopted 30 days; for example, in New York 
State and eastern Pennsylvania. In 1918, it was stated 
that terms in Texas, outside of the Dallas district, had been 
reduced to 30 days. In 1920, however, only one-third 
of the houses in the State, in particular those stocking 
principally heavy goods, sold on terms other than the 
regular 2 per cent 10 days, net 60 days. There was also 
a general tendency to shorten terms in the South, but it 
was hindered by the fact that the large middle western 
centers, such as Chicago, St. Louis, and Louisville, contin- 
ued on the 60-day basis. At the present time the majority 
of the southern jobbers still use the latter terms, which 
are customary also in various other large eastern and 
middle western markets, such as Cleveland, Pittsburgh, 
Detroit, Duluth, Kansas City, Omaha, Sioux City, Des 
Moines, and Denver, and on the Pacific Coast. 

Other Hardware Lines. — Distribution of iron and steel 
products and of heavy hardware is accomplished through 
one of three channels. There are exclusive metal houses, 
houses which deal in heavy hardware in addition to iron 
and steel, and hardware jobbers who have one department 
of their business dealing in these items. It has been stated 
that in the East the metal business in general is handled 
apart from hardware, whereas in other sections it is com- 
bined with hardware jobbing. Among the items embraced 
under the term heavy hardware, are bolts and nuts, horse- 
shoes, nails, heavy tools, such as anvils, vises, and hammers, 
etc. The more staple have long been known as relatively 
unprofitable items, the margin of profit being small, but 
turnover heavy (in the case of nails, estimated, in 1911, 



THE METAL INDUSTRIES 223 

at from 15 to 20 times a year). The terms on which the 
general class of items is sold differ according to the type 
of dealer. Terms on the several classes of rolled-steel 
products in large measure vary according to the manufac- 
turer 's terms. There has been a tendency for jobbers 
handling hardware, however, to extend hardware terms 
also on iron and steel. On the other hand, with the 
tendency of manufacturers during the past several years 
to decrease the discount allowed, hardware jobbers, a con- 
siderable proportion of whose business is in these lines, 
have shown a tendency to decrease the discount or to 
shorten terms on them, while continuing the regular terms 
on the regular hardware items. Thus in the South net 
terms in a considerable number of cases are 30 days, with 
either a 1 or 2 per cent discount for payment within 10 
days. Houses which do only a small amount of such busi- 
ness, however, continue the regular hardware terms on these 
lines. 

Builders ' hardware is generally considered a separate 
line. Owing to the technical knowledge required to prop- 
erly handle the somewhat intricate details of the business 
all hardware dealers do not handle it, and a special depart- 
ment is created by the wholesaler, which sells to retailers, 
contractors, and consumers. In the past, manufacturers' 
terms were largely 2 per cent 10 days, net 60 days, but 
there has been a tendency lately toward reduction of the 
net terms to 30 days. Builders' hardware in some degree 
is seasonable, in that consumers make larger purchases in 
the spring and fall, but datings are rare. Jobbers usually 
sell the item on the general hardware terms prevalent in 
the territory. In New York City and vicinity, builders' 
hardware is sold by the manufacturers, most of whom have 
branch offices, direct to the contractor or consumer. In 
exceptional cases, this may also apply when New York 
contractors erect large structures elsewhere. It is the 



224 THE MECHANISM OF COMMERCIAL CREDIT 

custom to require payment of 85 per cent of each month's 
deliveries by the 10th of the following month and the re- 
maining 15 per cent in 30 days after the completion of the 
building operation. 

Sporting goods are being handled to an increasing extent 
through the hardware jobbers. Years ago there were a 
considerable number of special jobbers confining their 
activities to the line, but at the present time there are 
stated to be less than half a dozen such houses in existence. 
While in general such goods are distributed through the 
jobber, some manufacturers sell direct to large department 
stores and others through their own branch stores, and 
direct to the retailer. The general terms, given both by 
manufacturers and by jobbers, are the same as in the case 
of hardware, namely, 2 per cent 10 days, net 60 days. 
During the war there was a tendency for the manufacturers 
of certain lines, such as firearms and ammunition, to de- 
crease the net period to 30 days In some cases proximo 
terms are given by jobbers, though this is not general. The 
business is distinctly seasonal. In this connection there 
are several general branches, each receiving a distinctive 
dating from some manufacturers as well as jobbers. These 
dates are April 1 on fishing tackle, baseball and general 
athletic goods, and October 1 on firearms and ammunition. 

Mill Supplies and "Machinery." 5 — Due to unity 
of dealers' interest, these two classes of goods are generally 
considered together. The title is not, however, strictly 
accurate, inasmuch as the term ' ' machinery ' ' refers in this 
connection rather to machine tools, that is, machines for 
doing work with cutting tools or utilizing minor tools in 
fashioning the wood and iron parts of machinery, perform- 
ing the five operations of planing, boring, turning, milling, 
and slotting. 

5 Acknowledgment is due Mr. H. W. Strong, Secretary, Strong, 
Carlisle and Hammond Co., Cleveland, for reading this section, 



THE METAL INDUSTRIES 225 

Mill supplies, exclusive of the metal lines, on the whole 
carry a cash discount of 2 per cent when sold by manufac- 
turers, with net terms of 30 or 60 days. Many exceptions 
are however found, and several dealers report that during 
the last few years quite a few manufacturers eliminated 
the discount or reduced it to 1 per cent. 

Machine tools, on the other hand, are sold by many of 
the large manufacturers on terms of net 30 days. Several 
authorities state that discounts given are largely by the 
newer and smaller manufacturers, possessing less financial 
strength and therefore less desirous of having capital tied 
up in receivables, but who after several years discontinue 
the same. Quite a number of well-established manufac- 
turers, however, allow a cash discount of 1 per cent, and in 
some cases 2 per cent is given. In certain cases the former 
discount is given on lighter tools, the heavier carrying no 
discount. It is estimated that of the standard line of 
machine tools possibly 80 to 85 per cent is sold through 
dealers and the balance by manufacturers. Direct sales 
occur more largely in the case of new tools or devices, the 
manufacturer introducing the same, and then getting the 
dealers to stock the item. An increasing tendency toward 
the distribution of both mill supplies and tools through 
dealers is noted. 

There is an increasing tendency for dealers to handle 
both classes of goods. Perhaps 75 per cent of distributors 
start with mill supplies only, later adding lines of machine 
tools, one at a time. Ninety per cent of mill-supply houses 
in the South also handle machinery. In general, mill sup- 
plies and machinery alone are handled, but in the West 
and in the less-developed sections, other lines, such as 
agricultural machinery, are also handled to a greater or 
lesser extent. In some cases the mill-supply business is 
combined with hardware jobbing. Separate departments 
usually handle mill supplies and machinery. In the han- 



226 THE MECHANISM OF COMMERCIAL CREDIT 

dling of the latter, mechanical knowledge is required, and 
there are therefore separate purchasing agents for both 
classes, although 90 per cent of the houses buying ma- 
chinery also buy supplies. 

In general, the terms of dealers conform to those upon 
which they are sold by manufacturers. Machine tools thus 
generally bear terms of net 30 days, in certain cases with 
cash discounts of 1 or 2 per cent for payment within 10 
days. Mill supplies generally carry terms of 2 per cent 10 
days, net 30 days or 60 days, although on certain items, 
mostly the metal lines, and items such as bolts, nuts, rivets, 
and some kinds of screws, the discount is only 1 per cent, 
and on some other items, such as iron and steel bars, no 
discount is given in certain cases. Proximo terms are used 
at times, likewise the trade acceptance. In the South, how- 
ever, dealers ' terms are generally 2 per cent 10 days, net 30 
days or 60 days, on sales of both supplies and machinery, 
these terms applying to approximately 90 per cent of the 
dealers' total sales. The difference in terms between ma- 
chine tools and mill supplies has been accounted for by 
differences in financial strength between the manufacturers 
of the two classes of goods, and also by the fact that many 
of the great variety of dealers' customers are small and 
with uncertain credit ratings. On the larger items, such 
as machine tools, dealers frequently cover their sales with 
some form of chattel mortgage or method whereby title 
is retained. In such cases an initial cash payment, such 
as 1/3 or 1/2, may be required with order or upon receipt 
of bill of lading, and the balance covered by interest-bearing 
notes maturing monthly for 3 or 4 months. In some cases 
6 months' time is given. 

Collections of dealers as indicated by the average num- 
ber of days' business represented by accounts receivable 
have always been considerably longer than the net period 
for which terms are nominally made. The average is esti- 



THE METAL INDUSTRIES 227 

mated at somewhere between 45 and 60 days, but closer to 
the second figure. The percentage of dealers' customers 
who discount their purchases is relatively small. While the 
figure, of course, will vary with the character of business 
of the house, information received from several houses 
indicates that slightly over 1/3 discount, approximately 
1/3 pay when due, and the remainder run past due. Deal- 
ers have tended to shorten the net terms actually taken by 
insisting upon stricter observance of the nominal terms, 
and certain houses have shown a considerable decrease in 
the number of days' business outstanding. It is interest- 
ing to observe that while " there have been a good many 
suggestions from dealers to manufacturers looking toward 
the reintroduction of the cash discount in the machine-tool 
trade," there has been no active effort comparable to that 
put forth by jobbers in other lines, such as hardware. It 
has been suggested that this is due to the fact that dealers 
in general work very closely with their principals, the 
manufacturers. It may be observed that dealers as a rule 
sell machine tools from samples carried in warehouse, while 
mill supplies are stocked by them. 

Machinery. 6 — Power machinery, including engines and 
boilers, and hoisting and conveying machinery have as regu- 
lar terms net 30 days. However, exception is made to such 
terms in two cases — where the machinery is to be erected 
or where the amount of the order is large. In some cases 
payment of from 50 to 80 per cent of the total amount is 
specified upon shipment of the material. Subsequent pay- 
ments are only 1, 2, or 3 in number, and a time limit, such 
as 3 or 4 months, is fixed within which final payment shall 
be made. Thus, for example, it may be specified that 60 
per cent is due upon shipment, 20 per cent in 30 days 
thereafter, and 20 per cent when the material has been 

6 Acknowledgment is due Mr. H. W. Strong, Secretary, Strong 
Carlisle and Hammond Co., Cleveland, for reading this section. 



228 THE MECHANISM OP COMMEKCIAL CREDIT 

erected. In other eases an initial payment upon signing 
of the order may be specified, though sometimes omitted, 
then monthly payments, as the work progresses, for 70 
per cent or more of the value of goods shipped and labor 
performed during a month, and a final payment of 10 per 
cent or more upon the erection of the machinery. In some 
cases the payments are required for the work done in the 
shop and the final payment is due upon the shipment of 
the machinery. Certain manufacturers vary the payment 
plan according to the size of the order. Thus, for orders 
under $5,000, not calling for erection, terms of net 30 days 
may be specified; for orders of from $5,000 to $20,000 not 
calling for erection, and orders up to $20,000 calling for 
erection, payment upon shipment may be required, with 
balance due in 30 days and upon erection; while for con- 
tracts of over $20,000, whether calling for erection or not, 
progressive monthly payments may be required, with the 
balance due upon completion of the work. 

Textile machinery is almost entirely sold direct by the 
manufacturer to the user. The regular terms on the do- 
mestic product are net 30 days from date of invoice. A 
very small proportion of sales are made upon terms of net 
60 days, and very infrequently a cash discount of 2 per 
cent is given for payment within 10 days. A study made 
in 1916 indicates that in some cases cotton-mill stock and 
bonds were accepted. Silk machinery, however, is sold 
to some extent on a time basis, estimates placing the total 
so sold at approximately 1/4 to 1/3 of the output. Pro- 
vision is made in such cases for the payment of from 1/3 to 
1/2 cash on delivery, and the balance is covered by notes 
due in 3, 6, 9, or 12 months. These notes are secured by 
a lease contract. Material use is made of the plan by new 
concerns which are usually short of capital, also in some 
cases for financially weak purchasers of other classes of 
textile machinery. 



THE METAL INDUSTRIES 229 

Printing machinery is also sold direct by the manufac- 
turer to the user. Either cash or deferred payment is 
specified. In the latter case an initial cash payment of about 
1/4 the amount is required, and the balance due within 
24 months, being represented by interest-bearing notes 
maturing monthly and secured by a lien on the machinery. 
In some cases a discount of 5 per cent is given for cash 
settlement on erection of the machinery. 

Railway Equipment. — The regular terms on which do- 
mestic sales of locomotives are made are net 30 days from 
date of delivery. 7 A leading manufacturer states that it is 
in most cases f. o. b. works, and that it refers only occa- 
sionally to time from acceptance when dealing with 
political subdivisions where the statutes specifically require 
formal acceptance prior to payment for the goods. Where 
the purchaser has insufficient funds, conditional sales or 
lease agreements are made. Security is afforded by a lien 
on the equipment. Such sales occur in particular to con- 
tractors or very small railroads, and in normal times only 
a very small percentage of the business is done on such 
terms. While the terms of payment vary greatly, provision 
is generally made for an initial payment ranging from 20 
to 33 1/3 per cent. Payment of the balance in equal monthly 
or quarterly installments is specified, the total period in 
general running not over 2 or 3 years, although in some 
cases up to 5 years. The payments are evidenced by notes 
drawing interest at 6 per cent. No general changes in 
terms during the past decade are noted, other than a more 
frequent formation of equipment trusts. In such cases 
either the regular terms prevail or cash upon completion 
or acceptance by the railroad is specified. 

Usual terms in car-builder's contracts, covering all 
classes of freight and passenger cars, call for cash on de- 

7 Acknowledgment is due Mr. J. Oakley Hobby, Jr., Treasurer, 
American Locomotive Co., for reading this material. 



230 THE MECHANISM OF COMMERCIAL CREDIT 

livery, that is, for invoices accompanied by inspector's 
certificate or receipt, or bill of lading of railroad first 
handling the cars, in lots of 25, 50, or 100 cars. 8 These 
terms prevail also in cases where equipment trusts are em- 
ployed, as has been done in recent years by many of the 
larger railroads. Occasional payment out of current funds 
by a few railroads with substantial credit is noted, in which 
case net 30 days from delivery has been specified. In a few 
cases short -time notes with interest have been taken where 
the amount involved was not very large. "While each case 
is treated individually, as a general rule a cash payment 
of approximately 25 per cent is required with the order, 
and the balance is represented by notes, part of which are 
due upon the delivery of the cars, and the remainder spread 
evenly over about one year. The cars remain the property 
of the builder until paid for. 

Terms in the case of sales of street railway, interurban, 
and subway cars are largely adapted to the particular case 
in question. While contracts specify cash on shipment, 
meaning sight draft attached to bill of lading, this is not 
rigidly adhered to. Ordinarily, however, payment in three 
equal installments, the last due at the close of 3 to 4 months, 
has represented the maximum terms. Deferred payments 
bear interest. 

Shipbuilding. 9 — Terms employed on ship construction for 
private domestic purchasers provide for an initial pay- 
ment upon execution of the contract. This is usually 5, 10, 
or 15 per cent and in rare cases 20 per cent of the purchase 
price. Subsequent payments of equal size are required 
when certain steps in the building of the vessel have been 
completed, such as laying the keel, plating, launching, etc. 



8 Acknowledgment is due Mr. N. S. Eeeder, Vice President, Pressed 
Steel Car Co., for reading this material. 

8 Acknowledgment is due Mr. J. P. Bender, Credit Manager, Beth- 
lehem Steel Co.j for reading this section. 



THE METAL INDUSTRIES 231 

The number of payments varies with the type of vessel and 
estimated time required for completion, but is stated to 
be approximately 10 or 12. The final installment, varying 
from 5 to 10 per cent, is generally due upon completion 
and delivery of the vessel. Prior to 1917, it was the gen- 
eral practice in certain cases, such as for large bulk cargo 
ships, to accept one-half the purchase price in first serial 
bonds, maturing in from 1 to 10 years. 



CHAPTER XIII 

THE AUTOMOTIVE, AGRICULTURAL IMPLEMENT, ELECTRICAL 
AND FUEL INDUSTRIES 

The present chapter deals with three principal groups of 
products. It includes items such as passenger cars and 
trucks, which are destined to serve as a kind of fixed capital 
to the final user ; items which are highly manufactured and 
small in size, such as automobile accessories and various 
electrical products, and fuel. Almost all these articles are 
therefore partly for household, partly for industrial use. 
The only ones in whose distribution the jobber plays a 
considerable role are automobile accessories, electrical prod- 
ucts and petroleum. 

While each class of article has its distinctive terms, the 
latter on the whole are short, except for those capital goods 
where specific provision is made to carry the purchaser. 
This is notably the case with agricultural implements, 
where net due dates are adjusted to the farmer's seasonal 
ability to pay. On both this item and automobiles, there 
is a tendency, where credit is granted, to use notes or ac- 
ceptances, instead of having the amount run on open 
account. Rubber goods, automobile accessories and elec- 
trical products carry terms of either 30 days or 60 days, 
certain items in the first named group also having a season 
dating. Discounts are generally 1 or 2 per cent, with the 
exception of automobile tires and tubes, for which terms 
are regularly 5 per cent 10th proximo, and of certain elec- 
trical products. Fuel is generally destined for current use, 
so that coal and coke carry net 30-day or proximo terms, 

232 



THE AUTOMOTIVE INDUSTRIES 233 

and petroleum products on the whole carry net terms of 30 
days, with corresponding discounts in some cases. 

Automobiles. 1 — Passenger automobiles and trucks are or- 
dinarily distributed by manufacturers through branch 
houses or distributors, who control a specified territory. 
The latter make arrangements with dealers in their terri- 
tory, but may also retail cars locally. 

The manufacturer receives cash payment, usually 
through use of a sight draft with bill of lading attached 
in the case of shipments, or payment before the car is 
driven away. In many cases the practice is to draw upon 
the distributor, who in turn draws upon the dealer, but 
in the case of financially strong dealers the manufacturer 
draws direct upon the latter. A cash deposit is often re- 
quired, either repayable at the expiration of the contract 
between manufacturer and distributor or applicable in 
specified amounts toward the purchase price of each car 
or truck. While sometimes a flat amount is stipulated, this 
is generally calculated roughly at so much per car con- 
tracted for, but the amounts required by different manu- 
facturers vary greatly. There is now quite a movement on 
foot to eliminate cash deposits, and this has been carried 
out by some leading manufacturers. 

In order to assist distributors and dealers in purchasing 
their passenger cars during the winter months, several 
plans have been devised by some of the larger manufac- 
turers in connection with carload shipments. A cash pay- 
ment per car is required, also certain additional payments 
for miscellaneous expenses. To the draft and bill of 
lading is attached a separate trust receipt and note for each 
car. The draft is drawn on the dealer direct in case of 
direct shipment to him. Notes are interest bearing and 
mature in from 5 to 3 months, a graded scale according to 

* Acknowledgment is due Mr. A. L. Deane, Vice President, General 
Motors Acceptance Corporation, for reading this section. 



234 THE MECHANISM OF COMMERCIAL CREDIT 

date of shipment being arranged, the earlier shipments 
carrying more time. Maturities range from April to June. 
Payment is required before the machine is disposed of. 
This plan calls for placing the car on the distributor's or 
dealer's floor. Instead, it may be placed in warehouse, in 
which event no trust receipt is used, but instead, a ware- 
house receipt is attached to the note representing the 
machine in question. The great majority of manufacturers, 
however, extend no assistance to the distributor and dealer, 
but leave the latter to obtain accommodation from his bank 
or from one of the finance companies which have specialized 
in this field. Some distributors have devised more or less 
similar plans for financing dealers, both in connection with 
sales of passenger cars and trucks. 

Distributors and dealers in some cases sell a considerable 
number of passenger cars on time, the partial payment plan 
being employed. While certain makers of higher priced 
cars report little use of such terms in connection with their 
product, some makers of popular-priced cars estimate that 
over half their product is sold on time. The size of the 
initial cash payment to the distributor or dealer differs, 
being stated variously as generally 25, 33 1/3, and 50 per 
cent. The balance is paid in monthly installments, the 
maximum time limit being given as 7 to 12 months. 
Security is afforded by the use of chattel mortgage, condi- 
tional sale, or lease agreement. In one-crop agricultural 
sections, such as the Northwest and South, it is stated that 
the farmer's note is at times taken for the entire purchase 
price of the car, being made payable at the time of market- 
ing the crop. 

While cash payment to the manufacturer is practically 
•universal in the case of passenger cars, a certain proportion 
of trucks are sold on time by manufacturers. A consider- 
able number, however, require cash payment. When sales 
are made on time an initial cash payment of 25 to 33 1/3 



THE AUTOMOTIVE INDUSTRIES 235 

per cent is generally specified, the balance usually being 
payable in 12 equal monthly payments, although the num- 
ber reported runs from 4 to 18. Security is afforded by the 
use of chattel mortgage, conditional sale, or lease agree- 
ment. In practical operation, plans such as these will ap- 
proximate those indicated in connection with winter pur- 
chases of passenger cars, the manufacturer drawing on the 
purchaser, releasing the truck under trust receipt (inas- 
much as it is placed on the floor, and not in warehouse), 
and receiving the series of notes, in place of the one note. 
Trade acceptances are used in certain cases in place of 
notes. 

Trucks are more largely sold on time by distributors and 
dealers than are passenger cars. Estimates in general agree 
that 70 per cent is so sold. The initial cash payment to the 
distributor or dealer is usually 25 or sometimes 33 1/3 per 
cent, and the balance is generally divided into 12 equal 
monthly payments. The period, however, may vary from 
90 days to 18 months. Interest-bearing notes are used. 
Security is afforded by the same 3 devices indicated above 
in connection with passenger cars. It is stated that there 
is a larger proportion of cash sales in the East than in the 
Middle "West or on the Pacific Coast, and that the duration 
of notes covering a sale in general will be for a longer 
period in the latter two territories. 

One of the leading automobile manufacturers has created 
a special banking corporation to assist in financing its dis- 
tributors and dealers. Three plans have been devised, two 
in connection with wholesale and one in connection with 
retail sales. The plans are substantially similar to those 
indicated above, with the exception that the banking cor- 
poration finances the sales, instead of leaving the purchaser 
and seller to make their own arrangements. In the case of 
sales by producing companies direct to distributors and 
dealers, notes are given by the latter to the corporation, 



236 THE MECHANISM OF COMMERCIAL CREDIT 

maturing in not over 6 months in the case of both passenger 
cars and trucks. The time varies according to the season 
and the territory. Where a trust receipt, covering the cars 
in question, is used, and cars are stored on the dealer's 
floor, a cash payment of at least 15 per cent is required; 
in the case of the warehouse plan, at least 10 per cent, a 
sight draft being drawn for this amount. "Drive-away" 
shipments, to be stored on the dealer's floor, likewise re- 
quire 15 per cent. 

In the case of sales by distributor or dealer to sub dealer, 
a trade acceptance is used, the distributor drawing on the 
subdealer and indorsing the acceptance to the order of the 
corporation, which pays the distributor or direct dealer its 
face value in cash. Maturity, margins, and other details 
are the same, the option being given of either floor or ware- 
house storage or drive-away shipments. The extent of use 
of the wholesale plans depends upon the season of the 
year. 

The retail plan is more largely used in summer, when 
the dealer does not find it necessary to place cars in storage. 
In the case of retail sales, the purchaser gives the dealer a 
non-interest-bearing note for the amount being financed, 
which calls for regular monthly payments, the time not 
exceeding 12 months in the case of passenger cars or 
trucks. The minimum initial payment is 30 per cent, and 
security is afforded in the usual manner, by chattel mort- 
gage, conditional sale, or lease agreement, according to the 
law of the particular state in which the sale is made. The 
dealer indorses this note, ordering payment to be made to 
the corporation and the corporation then buys the note 
provided the credit of the purchaser upon independent in- 
vestigation proves satisfactory, paying the dealer face value 
for it in cash. The details of the plan vary according to 
the individual case. The size of the initial payment de- 
pends both upon the number of payments specified and 



THE AUTOMOTIVE INDUSTRIES 237 

their frequency. Depreciation on the car is estimated and 
the user's equity considered. In case only several payments 
are made, at intervals of several months, the initial amount 
would be larger than if monthly payments were specified. 
Farmers alone are permitted to make an initial payment of 
at least 40 per cent, with payment of one-half the remainder 
at the close of 4 months, and the final payment at the close 
of 8 months, or with the deferred balance payable in three 
equal installments at intervals of three months. An alter- 
nate plan is also provided whereby the farmer may make 
instead an initial payment of at least 50 per cent and pay 
the balance in one payment within 7 months. The cor- 
poration resells directly to banks and investors' notes and 
acceptances arising from transactions under either of the 
wholesale plans, and collateral gold notes are issued against 
obligations arising from sales under the retail plan, and at 
times against notes and acceptances. 

Repair parts are generally sold by manufacturers on 
monthly settlement, due dates ranging from the 10th to 
the 20th, and no cash discount is allowed. In certain cases 
net 30 days is given, while cash on delivery is also specified 
in some instances. 

Rubber Goods. 2 — Among the various classes of rubber 
goods, automobile tires and tubes are by far the most 
important. The larger manufacturers have branch houses 
located in important centers. It is estimated that two- 
thirds to three-fourths the output is sold direct to dealers, 
instead of through jobbers. Under the latter head are 
included, in addition to special automobile accessory and 
hardware jobbers, also mercantile houses, wholesale grocers, 
farm implement wholesalers, etc. The larger retailers 
(located usually in the larger cities) also sell to some extent 
to small dealers in neighboring towns. Retailers or dealers 

'Acknowledgment is due Mr. S. G. Carkhuff, Secretary, Firestone 
Tire and Rubber Co., for reading this section. 



238 THE MECHANISM OF COMMERCIAL CREDIT 

may be either specialized or handle also other lines, such as 
hardware, or conduct garages or vulcanizing shops. 

The regular manufacturers ' terms on tires are 5 per cent 
10th proximo. In certain cases net terms are 30 days, 
although frequently no net terms are specified. On Pacific 
Coast shipments some manufacturers give 5 per cent 10th 
proximo of the second month on direct shipments to the 
dealer, which terms also obtain in some cases in other terri- 
tories where the distance to the branch or distributing 
point is great. Estimates of leading companies agree that 
from 75 to 85 per cent of the accounts are paid by the 10th 
proximo, though this figure, of course, varies with the 
several manufacturers. In general, no marked difference is 
reported in promptness with which collections are made 
from the different types of purchaser, although several 
manufacturers refer to the small garage dealer either as 
slowest pay or as presenting the greatest credit risk. It 
may be stated in this connection that the larger manufac- 
turers have an elaborate system of reports from branches 
to show the status of collections, including in one manner 
or another the proportion of accounts not discounted, those 
1 month and 2 months old, etc. 

In recent years a dating for tires shipped during the 
winter months, namely, from November 1, December 1, or 
January 1 to March 1 or April 1, or in one case from Sep- 
tember 1 to January 1, has been introduced. This varies 
somewhat with the individual manufacturer, and the same 
manufacturer may vary his terms from year to year, both 
as to period of shipping and dates of payment. April 1 
(and thus due date of May 10) is most common, although 
due date of April 10 is sometimes specified. The three- 
payment plan is used in certain cases, 1/3 of February ship- 
ments, for example, being due March 10, 1/3 April 10, and 
1/3 May 10, and at times the due dates for shipments dur- 
ing these months are April 10, May 10, and June 10 or May 



THE AUTOMOTIVE INDUSTRIES 239 

10, June 10, and July 10. Some manufacturers permit the 
buyer at his option to pay on either single or three-payment 
plan. Anticipation is permitted, in certain cases at the 
rate of 1 per cent per month, in others at the rate of 6 or 
8 per cent per annum. An increasing use of the trade 
acceptance is indicated, in particular, in connection with 
shipments bearing the spring due date. Bicycle tires, dur- 
ing the winter months, carry a dating somewhat similar to 
automobile tires. While certain manufacturers note a tend- 
ency to shorten terms, or rather to make prompter collec- 
tions, during the past decade, others report no change in 
this regard. 

Although a considerable number of companies confine 
their activities entirely to the manufacture of tires, others 
make to a greater or lesser extent the various other classes 
of rubber goods. It is stated to be the tendency for the 
larger companies to enlarge their products beyond tires 
and tubes, although some companies have commenced with 
other lines. The large companies manufacture practically 
all lines. Certain of these products, such as druggists' 
sundries and mechanical goods, are distributed largely 
through jobbers. On the other hand, rubber footwear is 
sold in large part direct to retailers. 

Mechanical goods as a whole are largely sold on terms of 
2 per cent 10 days, net 30 days or net 60 days. Occasionally 
large accounts receive 2 per cent second 10th proximo, with 
no net terms. Jobbers of thresher belts in some cases re- 
ceive a dating, May shipments bearing a 2 per cent discount 
if paid November 10, while shipments of garden hose from 
about November 1 to April 1, bear a spring dating of May 1 
or in some cases April 1. Fire hose, which is sold largely 
to municipalities, bears terms of net 4 months, or net 12 
months, interest being added at the rate of 6 per cent per 
annum in the latter case for the additional time taken. 
Insulated wire is sold on terms of 1 per cent 10 days, net 



240 THE MECHANISM OF COMMERCIAL CREDIT 

30 days. Druggists' sundries bear terms of 2 per cent 10 
days, net 60 days, no special dating being given. Rubber 
footwear datings differ. April 1 to November 1 shipments 
are due December 15 net. November and December "fill- 
in" shipments in one case carry about 30 days, and in 
one case January 1 to April 1 shipments are due net May 1. 
Shipments of tennis shoes, etc., from January 1 to May 31 
are due net July 1, and shipments during all other months 
are due net on the 15th of the second month following. 
Soles and heels carry terms of 2 per cent 10th proximo, or 
5 per cent 10th proximo. Rubber clothing carries a dis- 
count of 2 per cent. January to March shipments are due 
April 10. April and May shipments are due May 10 and 
June 10, respectively, while shipments from June to Sep- 
tember, inclusive, are due October 10 and shipments in 
the three following months have due dates of November 10, 
December 10, and January 10, respectively. All datings 
are subject to anticipation, although the rate may vary 
according to the product in question. On all these prod- 
ucts, proximo terms are employed to some extent in addition 
to the cases mentioned. 

As would be expected, the percentage of discounters on 
mechanical goods, druggists' sundries, and insulated wire 
is stated to be considerably less than on tires. One manu- 
facturer states that buyers of mechanical goods in general 
do not discount, as the average purchase is small and the 
discount not large enough to be an incentive. More than 
half of footwear customers are reported to anticipate. 

Automobile Accessories. 3 — At the present time there is 
little uniformity in marketing methods, and the latter are 
in a state of change, due both to the rapid growth of the 
industry, to the variety of products included under this 
head, and to the large number of manufacturers. A larger 

•Acknowledgment is due Mr. J. C. Ealston, Vice President, Beck- 
ley-Ralston Co., Chicago, for reading this section. 



\ 

THE AUTOMOTIVE INDUSTRIES 241 

proportion of sales are made by manufacturers direct to 
retailers than is usual in other lines, although the propor- 
tion varies greatly for the different products. 

Terms of sale of manufacturers in general are 2 per cent 
10 days, net 30 days, to both wholesalers and retailers. 
Proximo terms, usually the 10th but in some instances the 
15th or 20th, are permitted in certain cases to the larger 
purchasers, such as automobile manufacturers and those 
having a number of shipments during the month. Some 
manufacturers allow or request their customers to use a 
30, 60, or even 90-day trade acceptance with varying or 
no discount. On lines other than tires, dating is not a 
general practice, but some manufacturers give datings on 
large orders, often requiring a trade acceptance in such 
cases. The exceptions to the regular terms which are found 
are not as a rule confined to particular products which 
become conspicuous as bearing other than the regular terms. 

Jobbers of automobile accessories are of several types. 
Distinction is made between legitimate jobbers and semi- 
jobbers, the latter of whom are not financially able to take 
their discount, and do some retail selling. Development 
during the past few years has been twofold; in the first 
place, a class of accessory jobbers has become segregated 
from allied lines and has specialized in the field with in- 
creasing financial strength ; on the other hand, an increasing 
interest has been shown by the hardware jobber in the 
automobile accessory business. Retailers are of three types 
— specialty dealers, garage men, and hardware retailers. 
The garage man will naturally be the largest buyer of 
products which require installing, while the specialty re- 
tailer and hardware retailer will carry the balance. The 
retailer of hardware and the garage and car dealer do most 
of the accessory business in the South and West, while in 
the East a large proportion of it is done by the specialty 
retailers. 



242 THE MECHANISM OF COMMERCIAL CREDIT 

Terms of specialized accessory jobbers in general are the 
same as manufacturers' terms. While they themselves in 
large measure take the discount, their customers take the 
net 30-day terms, although terms to garage men are often 
C. O. D. Hardware jobbers, however, in general apply the 
regular hardware terms of 2 per cent 10 days, net 60 days, 
to the automobile accessories they handle, other than tires, 
for which jobbers' terms are almost universally the same as 
those of the manufacturers. Proximo terms are employed 
in some cases. Some business is done on a 30-day trade 
acceptance basis without interest. The only exception to 
the general terms is found in the case of heavier shop equip- 
ment to garage men where sale is made on contract covered 
by deed or title, notes being taken and equal payments over 
6 to 8 months specified. An alternative method where less 
time is required is to use the trade acceptance, splitting the 
payment by taking acceptances for 30, 60, and 90 days. 

Agricultural Implements. 4 — The ordinary method of dis- 
tribution in the industry is from manufacturer to branch 
house to retail dealer to farmer, and the great bulk of 
farm implements is marketed in this manner. Smaller 
manufacturers, however, frequently sell to jobbers, who in 
turn sell to the retail dealers. Many manufacturers dis- 
tribute a comparatively large amount of their implements 
through other manufacturers' branch houses. The branch 

*In the preparation of this statement, extensive use has been 
made of the following reports: Eeport of the Commissioner of Cor- 
porations on The International Harvester Company, March 3, 1913. 
Eeport of the Commissioner of Corporations on Farm-Machinery 
Trade Associations, March 15, 1915. Eeport of the Federal Trade 
Commission on The Causes of High Prices of Farm Implements, May 
4, 1920. These have been supplemented by the reports of the terms 
committee and the proceedings of the National Implement and 
Vehicle Association, and by inquiry of some leading manufacturers 
and of jobbers in the various sections of the country. Acknowledg- 
ment is due Mr. H. J. Sameit, Secretary, National Association of 
Farm Equipment Manufacturers (formerly National Implement and 
Vehicle Association), for reading this section. 



THE AUTOMOTIVE INDUSTRIES 243 

houses are thus enabled to carry a complete line of imple- 
ments. The system is found especially in the upper Mis- 
sissippi Valley. A recent study 5 shows that half the branch 
houses of 27 leading manufacturers, having 282 branch 
houses and selling to 140 jobbers, are located in 9 states — 
Ohio, Indiana, Illinois, Michigan, Wisconsin, Minnesota, 
Iowa, Nebraska, and Missouri. In these states sales are 
made to only 28 jobbing houses. Jobbing houses are mostly 
located in the far western and southern states. The above 
study shows that 8 states, namely, Oregon, California, 
Texas, Louisiana, Arkansas, Kentucky, Georgia, and Vir- 
ginia, have 59 jobbing houses and only 47 branch houses. 
It is stated that " perhaps more tractors are sold through 
independent jobbers or distributors than any other class of 
farm machinery." As a result of the shortening of terms 
which will be considered below, as well as the fear of pos- 
sible price declines, dealers do not place as large initial 
stock orders as formerly, and direct shipments from fac- 
tories to dealers have decreased, so that manufacturers are 
required to carry larger stocks at distributing points. The 
two outstanding changes in distributive methods during 
recent years have been the decrease in the consignment of 
goods and the increase in the number of branch houses, 
especially in the territories such as California, where for- 
merly they were less frequent. 

In order to simplify the discussion, the principal kinds of 
agricultural implements, the terms on which will be con- 
sidered below, may be conveniently classified as follows: 
Farm wagons ; seeding machinery, including planters, grain 
drills, etc.; harvesting machinery, including binders and 
mowers ; tillage implements, including plows, harrows, and 
cultivators ; and thrashing machinery and tractors. 

The history of terms in the industry may be divided into 

6 The 1920 report of the Federal Trade Commission. 



244 THE MECHANISM OF COMMERCIAL CREDIT 

two periods, the line of division being the year 1916. From 
that time and up to 1922 the standards of terms in the 
industry have been represented by the set of terms pre- 
pared annually by a committee of the National Implement 
and Vehicle Association, which was appointed in October, 
1915. The terms on which implements are sold were a 
favorite competitive device with manufacturers in the past, 
additional credit being granted as a means of increasing 
the volume of business. The farmer usually paid part cash 
at the close of the harvesting season and gave a promissory 
note in payment for the remainder in one or two annual 
installments. With the change from a commission to a sale 
basis, local dealers gave their own notes to the manufac- 
turer, whereas formerly a large amount of farmers' notes 
were taken by the latter. Long terms have been most 
prominent in the case of harvesting machinery, and are 
stated to have been established early in the 50 's on reaping 
machines. In 1902, the usual harvesting machine terms 
were said to be 1/3 the fall of the year when purchased 
(called cash), 1/3 the fall of the following season, and 
1/3 the fall of the second season. Excessive competition, 
however, frequently extended the time to 3 years, while it 
also resulted in the grant of one year's extra time without 
interest when crop conditions were unfavorable. Machines 
were also sold at the close of the harvest on what was called 
"next year's time" without interest, the first payment then 
only being due the following fall. Plows and special tools 
were, however, sold on short time or cash, while twine was 
sold principally for cash in the fall of the year when sold. 
About 1905 price differentials were quoted as between pay- 
ment in cash and in 2 or 3 installments, while interest was 
added on the notes, but subsequently only time prices were 
quoted, subject to specified cash discounts for prior pay- 
ment. Terms prevailing in 1911, for several leading types 
of implements are shown in the following table : 



THE AUTOMOTIVE INDUSTRIES 



245 









Notes to bear 






Pay- 




interest from 


Agent's 




ments 


Notes to mature 


(or from 


cash 




lim- 


not later 


date of de- 


discount 




ited 


than — 


livery of the 


date 




to — 




machinery) 




Grain binders 


Three 


Nov. 1,1911-12-13 


Sept. 1, 1911 


Oct. 1, 1911 


Corn binders. 


do. 


do. 


Oct. 1, 1911 


Nov. 1,1911 


Reapers .... 


Two 


Nov. 1, 1911-12 


Sept. 1, 1911 


Oct. 1, 1911 


Mowers 


do. 


do. 


do. 


do. 



The system of long credits is stated to have been extended 
to products other than harvesting machinery, such as 
manure spreaders and wagons. The increase in the per- 
centage which credit sales were of total sales in the domestic 
business of the International Harvester Company during 
the period 1904-1911 is as follows : 



Year 


Per- 
centage of 
sales for 
cash 


Per- 
centage of 

sales for 
notes and 

accounts 


1904* 


70.9 

74.4 
70.3 
67.3 
69.4 
68.9 
66.4 
64.2 


31.1 


1905 


25.6 


1906 


29.7 


1907 • 


32.7 


1908 


30.6 


1909 


31.1 


1910 


33.6 


1911 


35.8 







* Percentages as in original statement; do not equal 100. 

The data in the following table, giving the percentage 
each year of the total amount of notes which matured the 
first year, second year, etc., also bear on this matter. It is 



246 THE MECHANISM OF COMMERCIAL CREDIT 

seen that, while notes for the longer terms showed an almost 
uninterrupted decline, notes maturing the first year de- 
creased slightly, and those maturing the second year showed 
a great increase. 





Per- 


Per- 


Per- 


Per- 


Per- 




centage 


centage 


centage 


centage 


centage 


Year 


maturing 


maturing 


maturing 


maturing 


maturing 




first 


second 


third 


fourth 


fifth 




year 


year 


year 


year 


year 


1904 


34.7 


48.0 


14.4 


2.9 


. . . 


1905 


36.0 


50.4 


12.2 


1.4 


. . . 


1906 


30.5 


58.3 


10.2 


.9 


.1 


1907..... 


29.6 


63.0 


7.0 


.4 


... 


1908..... 


26.9 


66.3 


6.4 


.4 


... 


1909 


26.5 


66.7 


6.2 


.6 


... 


1910 


25.9 


67.7 


6.0 


.4 


... 


1911 


28.9 


64.2 


6.5 


.4 


... 



The efforts of the committee of the national association 
have been along the line of more uniform and shorter terms. 
A leading purpose has been to reduce the amount of capital 
invested in relation to the volume of business done; that 
is, to increase the rate of turnover. The terms represent 
maximum terms only, and it is stated in the committee's 
reports that "it is recommended that shorter terms should 
be adopted in many instances, especially where states are 
divided by trade centers." In the construction of these 
terms, the country since 1916 has been divided into 4 zones 
— the central, northern (all that portion of the United 
States lying north of the southern boundary lines of 
Oregon, Idaho, Wyoming, South Dakota, Minnesota, Wis- 
consin, Michigan, and New York), southern (the States of 
North Carolina, South Carolina, Tennessee, Arkansas, 
Louisiana, Mississippi, Alabama, Georgia, and Florida), 
and Texas. The time granted differs in the various zones, 



THE AUTOMOTIVE INDUSTRIES 247 

according to the type of implement, the conditions of use 
in the particular zone, and the time when crop returns 
are received. There has been a gradual restriction of the 
use of the "carry clause," granting additional time on the 
portion of the original order or shipments during the season 
remaining unsold at the close of the selling season for the 
implement in question. 

In 1916 and 1917, the committee also provided "standard 
net terms" to apply to all goods for all territories except 
the southern zone. These were substantially on the basis 
of 2 per cent 10 days, net 60 days, with specified datings of 
March 1 and July 1 for shipments during certain months. 
For some types of implements the dates were changed 
somewhat, and in the northern zone were 30 days later 
throughout. These terms reports continued in force until 
the opening of 1922, when they were withdrawn because of 
the unsettled business and economic conditions which pre- 
sented so many new and different conditions to the member- 
ship. They may be accepted as indicating the general norm 
which exists. As they are exceedingly complex, it will be 
possible to select here only a small number of implements 
representative of the various classes. 

Wagons. — Until recent years farm wagons were manu- 
factured largely by firms producing this article only, and 
where manufacturers have extended their efforts to other 
lines, this has generally been in connection with motor 
vehicles. In 1913, usual terms were "about 6 months except 
in straight carload lots, which could be carried for a period 
of 9 months or a year. ' ' The long terms customary in the 
South prior to 1916 caused much dissatisfaction, and in 
1915, certain southern manufacturers attempted to reduce 
terms to 5 per cent 30 days to 4 months, net 4 to 8 months, 
the longer periods, both for cash discount and net terms, 
applying on larger quantity shipments. At a joint confer- 
ence meeting of the wagon department of the National 



248 THE MECHANISM OF COMMERCIAL CREDIT 

Implement and Vehicle Association and the Southern 
Wagon Manufacturers ' Association in October, 1916, it was 
stated that it was evident that terms were being shortened, 
due largely to the cash terms then in force on articles pur- 
chased by the manufacturers, and the latters ' narrow mar- 
gin of profit. 

In November, 1916, the National Implement and Vehicle 
Association recommended terms on local shipments of 5 
per cent 30 days, net 4 months, with certain datings on car, 
half car, and mixed shipments, such as 5 per cent 1/2 Sep- 
tember 1, 1/2 October 1, net December 1, on shipments in 
April-August. Alternative use of terms of 5 per cent 30 
days, net 4 months, with April 1 dating on December- 
March shipments and the same datings as in cotton terri- 
tory, was provided. Subsequent discussions were had rela- 
tive to further shortening of terms, and in 1918, the ques- 
tion was referred to a special committee of the wagon 
department, but practically no changes in terms were made 
from those recommended the previous year, and the reports 
for 1919-1920 and 1920-1921 made no change from those for 
1918-1919. The less-than-carload terms last recommended 
were 5 per cent 30 days, net 4 months, with terms on car, 
half -car, or mixed-car shipments of 5 per cent June 1, net 
September 1, 5 per cent September 15, net November 15, 
and 5 per cent December 1, net February 1, on December- 
March, April-July, and August -November shipments, re- 
spectively, in the central zone, or the shorter terms of the 
wagon department of 5 per cent 30 days, net 4 months, on 
carload quantities, and 5 per cent 15 days, net 60 days, on 
less-than-carload lots, December-March shipments taking 
April 1 dating. 

. Seeding Machinery. — In March, 1916, terms recom- 
mended on grain drills and bar seeders for the central zone 
called for net September 1, or net December 15, with a cash 
discount of 5 per cent on May 1 or October 1 respectively 



THE AUTOMOTIVE INDUSTRIES 249 

and 4 per cent on December 1. A carry clause was pro- 
vided for both original spring and fall purchases. 

Discount dates were extended 30 days in the northern 
zone and in the cotton States. The terms recommended in 
1920 varied from zone to zone, as follows : 



Spring 



Central 5 per cent May 1 net Sept. 1 
Northern 5 per cent June 1 net Nov. 1 
Southern 5 per cent April 1 net July 1 
Texas 5 per cent April 1 net July 1 



Fall 



5 per cent Oct. 1 net Dec. 1 
5 per cent Oct. 1 net Dec. 1 
5 per cent Nov. 1 net Jan. 1 
5 per cent Oct. 1 net Jan. 1 



Various dates for shipment were also specified. The 
carry clause, applying to all zones, provides that ' ' any por- 
tion of original spring drill orders if on hand May 1, may 
be settled by note on fall terms in such territories as have 
both spring and fall drill trade/' except that in the north- 
ern zone the date is June 1 instead. 

Harvesting Machinery. — Little change has occurred in 
the terms noted on this class of implements. The terms 
recommended by the association vary somewhat between 
the different zones. Thus, while grain binders and reapers 
in the central and southern zones bore terms, in 1917, of 5 
per cent September 1, net November 1, in the Texas zone 
the dates were 1 month earlier, namely August 1 and 
October 1, and in the northern zone 1 month later, namely 
October 1 and December 1. The only changes in the 1920 
report related to the carry clause, which now covers 25 
per cent of shipments during the season in all zones other 
than the northern, where it applies to 50 per cent of the 
original order. Where unsold on September 1, it may be 
settled for by note due November 1 of the following year, 
less 5 per cent on September 1. 

Tillage Implements. — In this class of implements rela- 
tively slight changes have occurred in the recommended 



250 THE MECHANISM OF COMMERCIAL CREDIT 

terms. Taking steel and chilled walking plows as typical, 
terms, in 1917, were as follows : 





Spring 


FaU 




Per 

cent 


Discount 
date 


Per 
cent 


Discount 
date 


Net 
date 


Per 

cent 


Discount 
date 


Net 
date 


Central 
Northern 
Southern 
Texas 


5 

5 
5 
5 


April 1 
Mayl 
March 1 
Feb. 1 


4 

4 


Mayl 

June 1 


Julyl 
Sept. 1 
June 1 
Mayl 


5 
5 
5 
5 


Sept. 1 
Oct. 1 
Oct.l 
Oct.l 


Nov. 1 
Dec.l 

Jan. 1 
Jan. 1 



Various dates for shipment were also specified. In 1920, 
the only change was the elimination of the 4 per cent dis- 
count in the central and northern zones. 

Thrashing Machinery and Tractors. — The manufacture 
of thrashers was developed by a few large firms, which grad- 
ually extended "their business into other lines, particularly 
into tractors and portable engines." Thrashing outfits, 
including engine and separator with an attachment for 
stacking straw and chaff, have been usually sold to thrash- 
ermen, who thrash grain on contract. Due to the expense 
of the outfits, credit sales have been required, assignment 
of earnings being taken as security. The manufacturers 
early were interested in the credit problem, and it was the 
principal matter considered at their first meeting in 1884. 
In November, 1909, a resolution was passed by the Thrasher 
Manufacturers' Association limiting the cash discount for 
the year 1911 to 6 per cent, and on single sales fixing a 
maximum discount to agents of 5 per cent 30 days. No cash 
discount was to be allowed after 90 days from delivery, and 
the date for the agent's cashing all his season's business 
was to be fixed in the contract. In 1912, it was reported 
that more complaints had been received than ever before 



THE AUTOMOTIVE INDUSTRIES 251 

about selling on extremely \ong terms, and in the following 
year "resolutions were adopted recommending that mem- 
bers endeavor to increase cash payments and bring about 
shorter terms." In 1917, the National Implement and 
Vehicle Association established a tractor and thrasher de- 
partment, and terms have been regularly considered by a 
committee. In 1919, the committee again recommended 
the terms adopted in 1918 for the year 1919, but inasmuch 
as two members had modified them, recommended that the 
modified terms be made known to all the members, and that 
the adopted terms be changed to meet these modifications. 
It was also recommended that one week 's notice to the com- 
mittee of adoption of more liberal terms by any member 
be required. The last recommended terms were as follows : 

Class I (of specified power, or costing not over $1,500 
to dealer) . — 
To consumers: C. 0. D. or 1/2 C. 0. D. and 1/2 in 6 
months. Deferred maturity December 1. Future 
dating shipments after November 1 and before 
April 1 bear April 1 (northern zone May 1). 
To dealers: Shipments after April 1, cash deposit 
of $50 on first tractor and $25 on each additional 
one. Note for balance due October 1 or earlier. 
Small separators — if necessary, 25 per cent on 
delivery, balance in fall of that or next year. 
Class II ($l,500-$2,500).— Not over 2 falls. " 
Class III ($2,500 up).— Not over 3 falls. 

Deposit required on all orders in Class I sold for cash 
on delivery, of $50 on first and $25 on each additional 
tractor. Discounts for cash on delivery, or on first fall, 
not over 6 per cent ; or by dealer during first fall, not over 
10 per cent, for payment by the following dates: In 
southern zone, September 1; central, October 1; northern 



252 THE MECHANISM OF COMMERCIAL CREDIT 

and Texas, November 1. Reports from various sources state 
that tractors are now sold largely on a cash basis. 

Inasmuch as long terms have prevailed in the implement 
industry, the usual practice has been to take a promissory 
note to cover the net period, rather than to have it run on 
open account. These notes have varied in length from a 
few months to 3 or 4 years. During the last few years there 
has been a strong advocacy of the trade acceptance by the 
National Association. In 1916, a recommendation of the 
National Association of Credit Men was indorsed "that 
sellers send notes or acceptances for purchaser's signature 
with all invoices." There has also been an advocacy in 
some quarters of the elimination of the cash discount. In 
February, 1918, the wagon department recommended to 
the terms committee that it "work along the lines of the 
elimination of the cash discount, with the wider use of the 
trade acceptance." Accompanying these efforts has been 
an attempt to have the retail dealer in turn obtain paper, 
either note or trade acceptance, from the farmer, rather 
than to permit the account to run along on open account. 
Although the acceptance is used only to a limited extent, 
reports indicate that the users are generally satisfied with it. 

Up to recently greater uniformity of terms and lessening 
of the credit period has existed. The financing burden has 
been shifted "from the manufacturer to the retail dealer 
and the local country bank." This change is reflected in 
the greater rapidity of turnover of capital invested by 
manufacturers, as is shown by the table opposite covering 
22 companies: , 

The reduction of the length of the credit period not only 
increased the rate of turnover, but also decreased the 
amount of bills and accounts receivable, as well as the 
amount of capital required to carry on a given volume of 
business. This is illustrated in the following table, show- 



THE AUTOMOTIVE INDUSTRIES 



253 



Tear 



1913 
1914 
1915 
1916 
1917 
1918 



Total invest- 
ment in 
implement 
business 



$355,782,398 
390,351,286 
395,722,107 
383,526,911 
367,525,626 
386,408,735 



Total net 



$215,684,945 
195,647,453 
181,700,918 
200,848,125 
261,509,319 
326,636,666 



Period 
required 
for one 

turnover 
(mos.) 



20 
24 
26 
23 
17 
14 



ing the annual amount of bills and accounts receivable in 
the case of the above manufacturers : 



Year 


Bills 
receivable 


Accounts 
receivable 


Total 


1913 


$95,947,970 
96,180,296 
83,165,828 
60,755,297 
46,419,128 
42,538,712 


$64,549,983 
68,627,542 
51,397,723 
45,525,797 
44,744,801 
44,512,811 


$160,497,953 

164,807,838 

134,563,551 

106,281,094 

91,163,929 

87,051,523 


1914 


1915 


1916 


1917 


1918 







It will be observed that from 1913 to 1918, the receivables 
had decreased almost 50 per cent, notwithstanding the 
increased prices of implements and the fact that gross sales 
of these companies increased during the period from 
$229,000,000 to $339,000,000. The decrease, it has been 
suggested, may have been due partly also to improved busi- 
ness conditions, which made it possible for farmers and 
retail dealers to pay cash for larger amounts of their goods. 

The data which have been received relative to jobbers ' 
operations indicate that in this, as in other industries, the 
jobber purchases largely on a cash basis, while selling on 



254 THE MECHANISM OF COMMERCIAL CREDIT 

credit to a considerable extent. Their own terms to dealers 
are stated generally to follow closely those made by manu- 
facturers, the latter providing the standard. 

Electrical Products. 6 — Considerable variety is found 
both in terms of sale and in marketing methods of electrical 
products. It is estimated that, on the whole, about 65 per 
cent of the output of electrical appliance manufacturers is 
sold to jobbers, 25 per cent to dealers and 10 per cent to 
consumers. Power apparatus, with the exception of small 
motors, is sold direct to central stations. About 75 per cent 
of jobbers' sales are to dealers and 25 per cent to consumers. 
There are a relatively few small manufacturers who sell 
direct to the consumer. Distributive methods vary greatly 
with the individual products, due in part to the great 
variety of users. These range all the way from railroads, 
street railways, telephone companies, central stations and 
industrial corporations on the one hand, to the individual 
buying for household use on the other, and the character 
of the articles differs accordingly. 

In a general way, net terms granted by manufacturers 
are either 30 or 60 days, while cash discounts vary with 
different articles. Some bear no discount, while at the 
other extreme are articles bearing 5 per cent. Proximo 
terms are given in certain cases. On the average, on items 
handled through jobbers, manufacturers' terms are 2 per 
cent 10 days, net 60 days to jobbers and retailers and 2 per 
cent 10 days, net 30 days to consumers. Very large orders 
and orders of bulky apparatus, whether handled through 
middlemen or not, are sold largely on a contract basis. 
Datings are rare, but in certain cases a series of trade ac- 
ceptances is used, each for 1/3 the amount, and maturing 
in 30, 60, and 90 days respectively. 

6 Acknowledgment is due Mr. Franklin Overbagh, General Sec- 
retary, Electrical Supply Jobbers' Association, for reading this 
section. 



THE AUTOMOTIVE INDUSTRIES 255 

Jobbers, in general, give to their customers the same cash 
discounts as they receive from the manufacturers, but they 
may vary the net terms. The jobber's regular net terms 
are 30 days, while he may be quoted net 60 days, net 30 
days, or no net from the manufacturer. In 1920 manufac- 
turers were having considerable difficulty in keeping job- 
bers supplied, and consequently had considerable power in 
making their own terms, while, on the other hand, compe- 
tition among jobbers still remained keen enough to make 
them inclined to give concessions to their customers. It is 
understood that these customers in many cases have run 
beyond the nominal net period. Offsetting the strategic 
position of the manufacturer is the rapid growth of the 
industry and the great number of specialty devices, which 
make the service of the jobber not only of great value but 
almost essential to the successful introduction of these 
products. In the jobbing of specialties it is stated that the 
jobber has been particularly favored due to the absence of 
reputable retail dealers, and the result has been that the 
jobber, receiving regular jobbing price quotations, has done 
retailing himself. However, this practice is declining as a 
class of reputable retail dealers develops. 

The products of the industry may be classified into the 
following 5 groups, according to the cash discount allowed. 
These discounts are quoted both by manufacturers and by 
jobbers to all their customers. 

1. No cash discount, net 30 days. 
Telephone lead covered cable. 
Poles. 

Power motors and fans. 
Transformers. 
Railway supplies. 
Telephone apparatus. 
Testing instruments. 
Meters. 



256 THE MECHANISM OF COMMERCIAL CREDIT 

High-tension insulators. 
Washing machines. 
Sewing machines. 
Vacuum cleaners. 
Dishwashers. 
Arc lamps. 

2. One-half per cent, 10 days. 

Annunciator wire. 
Bare copper wire. 
Magnet wire. 
Damp-proof office wire. 
Weatherproof wire. 

3. One per cent, 10 days. 

Cross arms. 
Lamp cord. 
Rubber covered wire. 
Lead covered wire. 
Line hardware. 

4. Two per cent, 10 days. 

Heating material. 

Condulets. 

Dry batteries. 

Storage batteries. 

General supplies. 

Porcelain (except high tension). 

Sockets and receptacles. 

Snap and push switches. 

Klaxon horns. 

Hughes ranges. 

Ironing machines. 

Incandescent lamps. 

5. Five per cent, 10 days. 

Condulet outlet boxes and covers. 

Flexible metallic conduit conductors and fittings. 

Rigid iron conduit. 

The balance of the products are sold on a contract basis. 
This applies to rotaries, large motors and generators, large 
transformers, and large switchboards; that is, products 
which are usually sold direct to consumers, involving more 
or less installation work. Contracts are also used in the 



THE AUTOMOTIVE INDUSTRIES 257 

case of large orders of any of the previously mentioned 
products. Standard contracts call for 50 per cent cash, 
sight draft, bill of lading attached, 40 per cent in 30 days, 
and 10 per cent in 60 days. These terms, however, are 
varied in accordance with the credit standing of the cus- 
tomer as well as the progress of the installation work, the 
last payment in the latter case being so arranged as to fall 
due when the work is completed. Selling goods on con- 
signment is an exception, but some large manufacturers of 
fan motors sell their product on this basis. Some manu- 
facturers grant 10th proximo terms to approved customers 
or to those settling regularly on a monthly basis. In cer- 
tain cases semi-monthly settlement, for example on the 10th 
and 25th, is provided. On large orders of electrical wiring 
devices the standard contract terms are 1/3 on delivery, 
1/3 in 30 days, and 1/3 in 60 days. 

The regular net terms of jobbers are 30 days, while the 
discounts granted are those already indicated. Interest is 
generally at the rate of 6 per cent after the due date is 
passed, and overdue bills are subject to sight draft without 
notice. The trade acceptance is used more by jobbers in 
this line than by manufacturers and as a matter of fact is 
quite generally used. Thirty-day acceptances are most com- 
mon and are mailed with the statement on an average 15 
days after the sale, so that settlement occurs in 45 days, 
which corresponds to the current collection period on open 
accounts. Some customers may give a 60-day trade accept- 
ance, instead of the 30-day. Jobbers may allow their large 
customers to settle on the 10th proximo. 

Coal and Coke. 7 — Anthracite coal is generally sold by 
the railroad coal companies through sales agents direct to 
manufacturing plants and to dealers. While several of 



7 Acknowledgment is due Mr. Geo. H. Cushing, Managing Director, 
American Wholesale Coal Association, for reading this section. 



258 THE MECHANISM OF COMMERCIAL CREDIT 

the independent producers sell to retailers direct, 8 the 
greater number market their coal through "jobbers" on a 
commission basis, and a few sell outright to jobbers and 
retailers, disposing of their product from week to week to 
the highest bidders. A considerable amount of coal is con- 
signed by producers to local wholesalers or retailers. 
Jobbing, in the restricted sense of sale by carload or barge 
load without physical handling but with outright purchase 
of the coal (thus excluding sales agencies) is on the whole 
relatively small in the case of anthracite, but a considerable 
proportion of bituminous coal is handled through jobbers. 
The methods of transacting the business are less rigid and 
definitely fixed in the case of bituminous coal, in particular 
with regard to retail dealers who handle the same. Jobbers 
in large part, however, do not rigidly confine themselves to 
handling only either anthracite or bituminous. In the case 
of anthracite there is a considerable overlapping between 
the two classes of jobbers. Most jobbers supply the local 
trade only, although a few maintain branch offices at vari- 
ous points. In certain centers, for example, Buffalo, De- 
troit, and Chicago, there exist, in addition, local wholesale 
trestle and dock companies, who in some cases do also a 
retail business. 

In certain sections of the country, the movement of coal 
is distinctly seasonal, whereas in other sections it is stored 
to a greater or lesser extent. The territory beyond the 
head of the Great Lakes is very largely supplied by ship- 
ments up the lakes during the summer, which are stored on 
the docks and shipped out during the fall and winter 
months as needed. Some all-rail coal from Illinois and 
Indiana fields, however, goes to the Northwest during the 
winter. To a certain extent winter supplies of coal are 

8 The data relative to anthracite coal contained in this paragraph 
have been taken from the Eeport of the Federal Trade Commission 
on Anthracite and Bituminous Coal, June 20, 1917. 



THE AUTOMOTIVE INDUSTRIES 259 

moved into New England during the summer, although 
both rail and water-line coal also move in during the winter. 
There is some storage in northern New York. Bituminous 
coal is stored to some extent during the summer by business 
houses, but over the remainder of the United States the 
movement of coal is largely seasonal. As is well known, 
storage is more difficult in the case of bituminous than in 
the case of anthracite, both because of the deterioration of 
the softer bituminous and because of danger of spontaneous 
combustion when the coal is not properly stored. 

Distinction should be made in the methods of conducting 
business between the territory east of a line north and 
south through Erie and Pittsburgh, and the territory west 
thereof extending to the Rocky Mountains. In the East 
the tonnage is larger, the qualities of coal differ, and 
methods of merchandising are entirely different from those 
in the West. In the East supply and demand are more 
nearly equal, whereas in the western section a buyer's 
market has almost uniformly prevailed. There has been a 
corresponding difference in the degree to which business 
terms may be insisted upon. 

Producers ' terms on anthracite are practically univer- 
sally net 30 days. In certain cases proximo terms, for 
example, the 15th, are provided. Provision is made for the 
requirement of payment in advance for further shipments 
if the credit of the customer is impaired, or cancellation of 
the contract at the seller's option in case the amount is 
unpaid. In certain cases anticipation at the rate of 6 per 
cent per annum is provided, or 1/2 per cent is given for 
payment within 10 days. The same rate of interest is 
charged on overdue accounts. The coal which is purchased 
outright by dock companies at the head of the Great Lakes, 
rather than handled on consignment, generally bears terms 
of net 60 days from date of bill of lading. 

Bituminous coal is generally sold by producers on 



260 THE MECHANISM OF COMMERCIAL CREDIT 

proximo terms, the 15th being perhaps most frequent, 
although dates range from the 10th to the 25th. In some 
cases settlement twice a month, for example, by the 5th 
and 20th, is required. While proximo terms are customary 
in the case of contract business, in some cases net 30 days 
is specified, and it is largely used for spot or open market 
sales. Longer terms, such as 60 days, are given in some in- 
stances, although producers in many cases use the uniform 
sales contract containing a clause similar to that con- 
tained in the anthracite producers' contract providing for 
cancellation of the contract at the seller's option in case 
the account is unpaid, or the credit of the purchaser is 
impaired, also that accounts 10 days overdue are subject to 
sight draft with interest from time of maturity. 

This by no means implies, however, that settlement 
has been prompt in all cases. 9 From certain sections it 
has been stated that purchasers largely run beyond the 
due date, one producer stating that payments in general 
are effected from 15 to 45 days thereafter, and that 
although it is endeavored to collect interest for the extra 
time taken, it is next to impossible to do so. In one field 
an account is rarely considered old until 60 days past due 
while it is stated in others, that few purchasers make 
payments until the coal reaches its destination, and some 
only on the 10th proximo thereafter. Payment is thus made 
on the basis of coal received rather than on coal shipped. 

The railroads are stated often to take up to 90 days, 
while in certain cases longer terms are given them than are 
given other purchasers. In several western fields large 
steam users receive up to 60 days, whereas 30-day terms are 
specified for ordinary consumers and dealers. Lake and 
tidewater shipments, on account of longer time between 

9 Operators at times, however, may receive payment in less than the 
customary 30 days, in order to encourage shipments or to assist in 
financing them. 



THE AUTOMOTIVE INDUSTRIES 261 

date of shipment and actual consumption of the coal, also 
bear longer terms than do ordinary shipments, net 30 or 
60 days from date of loading at the port being frequent, 
although in some cases interest at the rate of 6 per cent per 
annum is charged for time beyond 30 days. When this 
extra time is given, the purchaser is stated usually to sign 
an acceptance. Discounts for cash are very rare. In some 
cases anticipation is allowed at the rate of 6 per cent per 
annum, in other cases, 1/2 per cent 10 days is given, while 
in one of the southern fields cash discounts up to 2 per 
cent are reported. 

Coke, in particular by-product coke, is produced by cer- 
tain of the large consumers themselves, or by plants which 
they control. All coke is generally sold on terms calling 
for payment by the 20th proximo, but in some eases the 
10th, 15th, or 25th is specified. Certain purchasers are 
stated to elect to make settlement twice a month instead. 
A sight draft with bill of lading attached, as in other indus- 
tries, is generally used only in the case of poor credit 
risks. Furnace coke is largely sold to steel producers, but 
there are many small foundries which purchase foundry 
coke. At times the financial responsibility of some foun- 
dries is somewhat impaired, but ordinarily little difficulty is 
found in making collections. In very rare cases, a note is 
accepted for foundry or domestic coke that is put into stock 
for future use. There have been no general changes in 
terms in the coal and coke industry for 15 years or more. 

Wholesalers' terms on both anthracite and bituminous 
in large measure parallel operators'. Proximo terms are 
largely employed, such as the 10th and 15th. Anticipation 
is permitted in certain cases, such as for tidewater coal at 
New York, at the rate of 6 per cent per annum, correspond- 
ing to a cash basis of 1 per cent. Spot sales on anthracite 
at New York bear the same terms as contract sales, namely, 
15th proximo (formerly the 25th), although sales are often 



262 THE MECHANISM OF COMMERCIAL CREDIT 

made for cash, and a slightly lesser price, such as 5 cents 
per ton, is quoted in such cases. The average purchaser of 
bituminous is said to be less prompt than the average re- 
tailer of anthracite, and accounts, for example, at New 
York and Boston, often run to 90 or 120 days. When busi- 
ness is normal it is stated from Boston that anthracite 
wholesalers often extend considerably longer than 30 days, 
but in times of shortage the prompt collections made by 
retailers enable prompter payment of wholesalers. It was 
stated in the study cited above that the extension of credit 
has some influence upon the choice of coal handled by the 
local dealer, and practical and exclusive connections are 
made when he is carried by the wholesaler. 

Petroleum. 10 — The commercial organization of the petro- 
leum industry at the present time is exceedingly complex. 11 
Whereas in the earlier days there was a rather well-defined 
division of the field into production, transportation, refin- 
ing and marketing (though the latter two were often com- 
bined), there is now considerable combination of all four 
classes of business. There is an increasing tendency for the 
larger units to sell to consumers, and the systems of service 
and filling stations are being steadily extended, as well as 
the tank-wagon service. In the remote sections there is, 
of course, the greatest dependence upon the local dealer. 

The method of marketing varies with the type of product. 
Crude oil is purchased by refiners to some extent, although 
the larger companies obtain a considerable supply from 
their own wells or those of affiliated companies. Refiners, 
to some extent, sell the various petroleum products to one 
another. Aside from such sales, the lighter products, such 
as gasoline and kerosene, as well as lubricating oil, are sold 

10 Acknowledgment is due Mr. A. S. Price, Credit Manager, Tide 
Water Oil Co., for reading this section. 

"Certain of the data on this subject have been taken from the 
studies of the Federal Trade Commission, in particular the Eeport 
on The Price of Gasoline in 1915, April 11, 1917. 



THE AUTOMOTIVE INDUSTRIES 263 

by refiners to jobbers and retailers, and direct to large con- 
sumers. Fuel oil (including also gas oil and road oil), 
on the other hand, while often sold to jobbers, is usually 
sold direct to consumers, estimates placing the amount so 
sold at upwards of 80 to 90 per cent of the output. In 
certain cases refiners dispose only of their surplus products, 
such as fuel oil, to jobbers, while selling the other products 
direct to retailers and consumers. In the Middle Western 
States, a large number of relatively small refiners have 
grown up, who depend to a great extent upon separate 
jobbers for the marketing of their products, which, how- 
ever, include relatively little lubricating oil. Jobbers' cus- 
tomers are stated by some to be considerably smaller than 
customers of refiners. Middle western refiners' sales to 
jobbers vary in amount from 1 to 1,000 tank cars, and 
sales of from 100 to 200 cars are very common. Sales from 
jobbers to dealers and consumers range in amount from 5 
to 1,000 gallons, delivery usually being made from tank 
wagon, except in the case of lubricating oil, which is usually 
shipped in drums of 50 gallons. 

Judging from the data available, there appears to have 
been little attempt to obtain absolute uniformity of terms 
in the industry during the past decade. Only one instance 
has come to notice of formal recommendation of terms. 
In 1913, a middle western association representing inde- 
pendent marketing interests adopted a set of regulations to 
govern trading in petroleum. These regulations were con- 
cerned more particularly with questions such as fixing 
standards for the various petroleum products in order to 
avoid disputes over the specific gravity or viscosity of oils, 
what constitutes a good delivery, etc. The regulations con- 
tained a section dealing with terms, and were revised in 
1915. Regular terms, however, are generally recognized for 
each of the principal classes of petroleum products. A 
basis for an understanding of the differences in terms as 



264 THE MECHANISM OF COMMERCIAL CREDIT 

between the various products is afforded by the differences 
in marketing methods outlined above. For several years 
there was a shortening of terms on the refined products, in 
particular about 1918. The trade acceptance also came into 
some use. It is estimated by a large eastern refiner in 
1920, that collections in the industry, in general, averaged 
about 45 days. G-arages on the whole were slowest pay. 

Turning to the individual products, crude oil is sold 
on strictly net terms. Settlement is required either once or 
twice a month. The dates are stated generally to be the 
10th and 25th in the mid-continent field. In some sections 
considerable variation is noted, different California refiners, 
for example, placing the figure variously at the 10th, 20th, 
and the 15th to the 25th. 

The shortening of terms in the industry is well illustrated 
in the case of the lighter refined products, such as gasoline 
and kerosene. These now bear terms of net 30 days. Prox- 
imo terms such as the 15th may be specified in certain cases. 
A discount of 1 per cent for payment within 10 days pre- 
vails in some sections, in particular the mid-continent field, 
and such, in fact, are the recommended terms on these 
products mentioned above. These products are stated to 
be generally considered as cash products in that field, and 
it is said that the customer who takes 30 days' time is 
frequently regarded as undesirable, almost all firms dis- 
counting their bills. A sight draft has largely succeeded 
the use of the recommended terms for all the classes of 
refined petroleum products. Prior to December 1, 1918, 
a cash discount of 2 per cent 10 days had been allowed in 
California in many cases, although one of the leading com- 
panies had as its terms 2 per cent 10 days, net 60 days, 
when contained in cases, drums, and iron barrels, and 1 
per cent 10 days, net 60 days, under special contract at 
special prices. Prior to about 1918, the net period was 
largely 60 days in many sections. 



THE AUTOMOTIVE INDUSTRIES 265 

Distinction is made by certain refiners between carload 
shipments on the one hand and less-than-carload shipments 
and deliveries in bulk from stations and out of tank wagons 
on the other hand, corresponding in considerable measure 
to a difference in type of purchaser. Oil jobbers having 
bulk storage purchase in carload lots, which they barrel or 
can and ship to factories, garages, and storekeepers. Gaso- 
line is sold by refiners, in addition to tractor and automobile 
manufacturers and to large garages. Whereas the carload 
shipments bear the regular terms given above, less-than- 
carload shipments bear considerably shorter terms. In 
particular, for tank-wagon deliveries and filling-station 
sales net cash is largely required. Weekly or 10-day settle- 
ment is now specified in certain cases, whereas formerly 
monthly settlement was largely permitted and is still to 
some extent. These terms apply, in general, to other refined 
products also. 

Branded automobile oils are sold in carload lots by only 
a small number of the larger companies, the purchasers 
being garages and automobile-accessory jobbers. Terms on 
both carload and less-than-carload business are largely 1 
per cent 10 days, net 30 days. In the case of lubricating 
oils and greases and wax, carload lots are sold more partic- 
ularly to jobbers such as mentioned above. One refiner 
applies the regular net 30-day terms to carload business but 
grants a discount of 1 per cent 10 days on less-than-carload 
shipments and bulk deliveries from stations and out of 
tank wagons. In the latter sphere competition is experi- 
enced, not only with the limited number of refiners doing 
a carload business, but also with those refiners doing a 
less-than-carload business and the jobbers who do practi- 
cally nothing but a less-than-carload business. In California 
the discount was eliminated December 1, 1918, and terms 
are now net 30 days or net 60 days, proximo terms, such 
as the 10th, being employed in some cases, whereas formerly 



266 THE MECHANISM OF COMMERCIAL CREDIT 

a 2 per cent discount had been largely given. A leading 
refiner selling largely to railways has terms of net 60 days. 
The product in 'general, however, still largely carries a 
cash discount. In the mid-continent field terms are either 
2 per cent 10 days, net 60 days, or 1 per cent 10 days, net 
30 days. The former are also the terms recommended by 
the association mentioned above, but prior to 1915 the 
net period was only 30 days. Each of the two sets of terms 
prevalent in the mid-continent field is now used by some 
of the larger refiners in other sections, and no absolute 
uniformity of practice prevails. A more or less general 
tendency, however, has appeared to be evident toward 
terms of 1 per cent 10 days, net 30 days. It has been 
suggested that the generally longer terms and cash discount 
prevalent on lubricating products are due to the fact that 
they are more of a specialty and consequently of a less 
rapid turnover as compared wkh other products, such as 
gasoline. 

Terms on fuel oil (including gas oil and road oil) are 
almost uniformly net 30 days. In certain cases proximo 
terms are employed, such as the 10th. A middle western 
jobber, however, reports that he receives a cash discount 
of 1 per cent 10 days from refiners on this product, and a 
large refiner states that such terms were occasionally given 
up to about four years ago. In the Southwest, cash on 
delivery is largely specified. These terms obtain also on 
bunker deliveries. In some instances up to 90 days is given 
to contractors in the case of sales of road oil, while terms 
of a leading refiner are net 60 days to roofing manufac- 
turers. Purchasers of all three products, as a rule, pay 
more promptly than do purchasers of the other two prin- 
cipal classes of products. Municipalities are stated to be 
the slowest-paying type of purchaser of this class of 
product. In certain southwestern districts, in particular in 
rice-growing sections, fuel distillate is delivered to farmers 



THE AUTOMOTIVE INDUSTRIES 267 

on contract in the spring and summer, with October 1 or 
November 1 due date. 

It is stated rather often in the industry that jobbers ' 
terms are longer than refiners' on similar products. In the 
case of the lighter oils, less than carload shipments, in 
general, bear terms of 1 per cent 10 days, net 30 days, 
and lubricating oil bears instead a discount of 2 per cent. 
In some cases, middle western jobbers' terms are given as 
net 30 days on gasoline and net 60 days on lubricating 
oil. Certain jobbers, however, state that, while their terms 
from refiners on the several products differ as indicated 
above, they endeavor to make their terms uniformly 1 per 
cent 10 days, net 30 days, on all products. The net period 
on lubricating oil some years ago was 60 days. In some 
cases 1/2 per cent 10 days, net 30 days, is quoted on refined 
oil and gasoline and 1 per cent 10 days, net 30 days, on 
lubricating products. While these are the nominal terms, 
purchasers are stated in certain cases to take longer time. 
It is reported that from 60 days to 6 months is frequently 
extended by middle western jobbers. Tank-wagon deliver- 
ies of gasoline and kerosene, however, are usually on a net 
cash basis, as in the case of similar sales by refiners. In 
some cases the time has been reduced from 15 to 30 days 
since about 1917. 



CHAPTER XIV 

THE TEXTILE MANUFACTURING AND DRY GOODS INDUSTRIES 

The present chapter deals with a group of articles which 
are destined, in last analysis, chiefly for consumptive in- 
stead of for industrial use. 1 Most important among these 
products is cloth, either cotton, wool or silk. It passes into 
use via one of two channels — the garment manufacturer 
producing ready-to-wear apparel, or the distributor. Con- 
sideration of terms in the apparel lines will be deferred 
until the following chapter. 

An outstanding feature from the point of .view of terms 
of sale is the fact that the goods pass into consumption 
largely at certain seasons of the year. This means that 
the retailer must defer payment until he has in hand 
receipts from his period of heavy sales. This may be done 
either through a regular season dating or through an extra 
dating. Similarly, the wholesale distributor and the cloth- 
ing manufacturer also require time and obtain a dating 
from the cloth manufacturer. In other words, the period 
of time elapsing between initial manufacture and final 
purchase by the consumer is divided between the several 
factors engaged in producing and distributing the article, 
and each bears part of the burden. Only in certain cases, 
such as for articles serving manufacturers as raw material 
(for example, yarns and cotton grey goods) is it possible 
to have terms approximate cash. Net 10 days, in fact, is 
often specified for these articles. 

1 Certain of the data relative to methods of distribution in the 
textile industry contained in this chapter have been ta?<en from 
Cherington, The Wool Industry (Chicago, 1916). 

268 



TEXTILE MANUFACTURING INDUSTRIES 2G9 

The manner in which the carrying burden is divided 
depends on the relative strength of cloth manufacturer 
and wholesale distributor or clothing manufacturer. The 
retailer in any event is carried until his sales season. The 
problem is accentuated by the fact that these industries are 
by no means concentrated and a large number of individuals 
are found in them who possess little capital. Accordingly, 
considerable lack of uniformity in terms is possible and 
furthermore the terms tend to vary at different times ac- 
cording to market conditions. During the war period there 
was considerable scarcity of some classes of goods, such as 
certain cottons, underwear and hosiery, and manufacturers 
in many instances shortened their terms to 10 days. 

The discounts quoted in these lines are of two kinds. 
They may conveniently be termed respectively the dry- 
goods and the apparel discounts. The standard dry-goods 
terms are 2 per cent 10 days, 60 days extra, with season dat- 
ing in some cases, and these apply as well to manufacturers' 
sales under normal conditions of cotton goods and under- 
wear. On the other hand, in the distinctly apparel lines 
high discounts are the rule. These are found both for 
woolen piece goods and men's-wear jobbers, silks, laces and 
embroideries. The standard woolen terms, for example, 
are 7 per cent 4 months and graded discounts are employed, 
the highest discount being 10 per cent 10 days. In all the 
apparel lines these graded discounts (declining in size as 
the terms lengthen) are found as a general rule. It should 
be noted, however, that during the war period certain 
woolen manufacturers were able to change terms generally 
to either 10 per cent 30 days or net 30 days. 

Cotton 2 Yarns and Thread — Cotton thread is sold to 
both manufacturers of garments, etc., and to wholesalers 

2 Acknowledgment is due Mr. Elroy Curtis of Seaboard Mills, Inc., 
New York; Mr. Melbourne Smith, Managing Editor, and Mr. Harry 
Riemer, Cotton Goods Editor, Daily News Record, for reading this 
section. 



270 THE MECHANISM OF COMMERCIAL CREDIT 

and retailers. There are two corresponding special branches 
of the industry, manufacturers in many cases producing 
only thread for one of the two uses. On a yardage basis, 
about half the output consists of each type. Sales are made 
through selling agents or branch houses. It is estimated 
that from 70 to 80 per cent of the domestic line is sold 
to jobbers as against retailers. Terms, however, are uni- 
formly 2 per cent 10 days, 1 per cent 30 days, net 60 days, 
e. o. m. terms being given in certain cases. 

The large majority of cloth manufacturers produce their 
own yarns. 3 On the other hand, the bulk of the knitters 
buy their yarn, although there was for a time a considerable 
tendency among knitting mills to install spinning plants. 
Sales by yarn manufacturers are made either direct to 
these two classes of purchasers, or through brokers and 
commission houses. A tendency toward direct sale is re- 
ported, in particular for hosiery yarns. It has been 
estimated that roughly 50 per cent of southern spin- 
ners market their entire production through commission 
houses. Less use is made of middlemen by northern manu- 
facturers. 

With respect to terms of sale, weaving yarns must be 
distinguished from knitting yarns. Hosiery yarns often 
form a special group under the latter category. In addi- 
tion, distinction must be made between eastern and southern 
yarns. In general, southern weaving yarns alone bear 
terms of 3 per cent 10 days e. o. m. Southern knitting 
yarns and eastern yarns, both weaving and knitting, are 
sold on terms of 2 per cent 10 days e. o. m. or 2 per cent 30 
days. In Philadelphia, however, a special arrangement 
prevails calling for 3 per cent 30 days. 

3 Manufacturers of automobile tires, however, offered such induce- 
ments in 1919-20 that many weaving mills gave over the largest 
part of their spinning equipment to the manufacture of tire yarn 
and went out in the market to buy the yarn needed for their own 
cloths. 



TEXTILE MANUFACTURING INDUSTRIES 271 

These terms are, however, by no means universally em- 
ployed, and many variations are found. Some eastern 
manufacturers have terms of 2 per cent 10 days, net 30 
days or 60 days. The latter terms apply more frequently 
on knitting yarns. Net terms are more largely given by 
middlemen than by spinners, especially on sales to smaller 
manufacturers of knit goods, who buy more or less generally 
from commission houses. Sweater yarns are often sold on 
terms of net 10 days e. o. m., but in some cases 30 days or 
occasionally 60 days extra may be given with a cash dis- 
count of 2 per cent 10 days. 

One southern manufacturer reports an effort, after the 
war orders were over, to eliminate the discount and sell for 
net cash, which was opposed by brokers and commission 
merchants, who forced a return to the old terms. Another, 
however, states that many mills have succeeded in elim- 
inating the discount. 

Collections in the cotton-yarn industry in general are 
reported prompt. Several manufacturers report them 
quicker through commission houses than on direct 
shipments. 

Grey Goods. — The bulk of the cotton yarn produced is 
undyed, and is made up first into grey goods — that is, 
undyed and unbleached goods. Part of these goods are 
to be used in the grey and are sold to the jobber, while part 
are sold to industrial consumers, such as manufacturers of 
mechanical rubber goods and the bag trade. The bulk, 
however, require further treatment. They are then printed, 
finished, or converted either by the cloth manufacturer 
himself or by the merchant converter. The latter buys grey 
goods, has a professional converter convert them for him, 
and then sells the finished product to the same classes of 
purchasers as does the cloth manufacturer who does his 
own converting, namely, to jobbers, retailers, and the cut- 
ting-up trade. It is estimated that roughly 25 per cent 



272 THE MECHANISM OF COMMERCIAL CREDIT 

of the output of grey cloth is finished by the weaver, and 
that the balance is finished by converters.* 

The merchant converter buys grey goods either direct 
from the cloth manufacturer or through the medium of a 
broker. Fall River manufacturers sell their product almost 
entirely through brokers, and similarly with a few southern 
mills. New York commission houses, it is estimated, sell 
half their mills' products direct, instead of through 
brokers. It is stated that fine goods, novelties, and special 
cloths are handled practically entirely by brokers. 

The distributive methods, of course, vary with the type 
of product. Certain goods are sold to the industrial con- 
sumer. It has been estimated that of the total output of 
grey goods, 10 per cent is sold to jobbers, who either convert 
the goods or resell them to retailers for use in the grey, 
while the balance is sold to converters and printers on the 
one hand and industrial consumers on the other hand. 

Formerly a distinction was made in terms between print 
cloths and finer goods, which were generally sold on terms 
of net 10 days, and sheetings and coarser goods, which (in 
the case of materials sold to jobbers for resale in the grey) 
were generally sold on the dry goods terms of 2 per cent 
10 days, 60 days extra, 5 or 3 per cent 10 days, and (in the 
case of heavy cotton goods sold to industrial consumers) 
on terms of 2 per cent 10 days (in some cases 2 per cent 
10 days e. o. m.) . As a result of the war, and in connection 
with price fixing, the terms on coarser goods were also 
reduced, in 1917, to net 10 days, and the New York freight 
allowance formerly given by southern mills was eliminated. 
After the armistice, however, freight concessions were again 
granted by some mills, in addition to returning in certain 
eases to the old terms of 2 per cent 10 days, 60 days extra. 

4 Goods coming from the weaver finished, however, are largely 
colored yarn goods, such as shirtings, ginghams, denims, cheviots, 
and tickings. 

* These terms generally apply on all seconds also. 



TEXTILE MANUFACTURING INDUSTRIES 273 

It is estimated, however, that, due to the heavy demand for 
goods, 75 per cent of the mills were able to continue to sell 
on the shorter terms. The old terms are again used in the 
case of certain classes of grey goods, such as sheetings, 
due to competition. 6 Present terms thus are in general 
net 10 days, while in some cases 2 per cent 10 days; 2 per 
cent 10 days or net 60 days ; and 3 per cent 10 days, or 2 
per cent 10 days 60 days extra are given. It is stated that 
jobbers generally wish to be quoted the last-named terms. 

Finished Cotton Goods. — It has been estimated roughly 
that upwards of 50 per cent of the total output of finished 
cotton goods is sold to jobbers, 30 to 35 per cent to the 
cutting-up trade, and the balance to retailers. The meth- 
ods of distribution, however, vary according to the 
particular type of product and the corresponding type of 
purchaser. The large jobbers do some converting them- 
selves, more particularly of the cheaper staples than of the 
more expensive style goods. High-class wash goods, 75 
per cent of which go to the consumer over the counters of 
the stores in the large cities, are bought direct from the 
converter, while cheap calicos or percales, of which prob- 
ably only 25 per cent are distributed through the retailer 
in the large city, are sold by the converter to the jobber, 
who in turn sells them to the merchant in the smaller town. 

Staples must be distinguished from season goods. The 
former, which are sold all the year round, include goods 
such as bleached cottons, bleached cambrics, and bleached 
twills. Linings and shirtings are generally classed as staple 
goods, although they may be sold also as spring or fall 
goods, according to the character of the particular item. 

6 Grey goods have many special uses, in which eases terms differ 
from the general terms. Grey goods used for house linings afford 
an example. These are sold to jobbers, who in turn sell to paper 
hangers. Due probably to the length of time required in building, 
they are again sold on the old terms of 2 per cent 10 days, 60 days 
extra. 



274 THE MECHANISM OF COMMERCIAL CREDIT 

Dress goods, draperies, percales, and cambrics are examples 
of two season goods, while wash goods are classed as spring 
goods, and blankets and (at times) flannels as fall goods. 

Terms on finished converted or bleached goods are almost 
universally 2 per cent 10 days, 60 days extra on staples 
and on season goods between seasons. Season datings are 
April 1 and October 1 and apply on sales to both jobbers 
and retailers, although deliveries to retailers are made con- 
siderably later than deliveries to jobbers. Terms, in 
general, have been shortened. Many manufacturers have 
succeeded in abolishing season datings, although several 
have since restored them. Anticipation at the rate of 6 
per cent per annum is usually permitted. This gives a 
discount of 3 per cent 10 days, which at times is quoted 
in addition to the regular terms. Poor credit risks at times 
are quoted only 3 per cent 10 days, or 3 per cent C. 0. D. 
or cash before delivery. 

Certain types of products at times bear other than the 
regular terms. Occasionally a converter will give 4 months, 
irrespective of the kind of goods or type of buyer. Con- 
verters who deviate from the regular terms of 2 per cent 
10 days, 60 days extra, often have no permanent discount 
terms, but vary these with the rise and fall of the market. 
Little use is reported by manufacturers of trade accept- 
ances. 

Silk 7 Yarns and Thread — Silk yarns are of two kinds, 
spun and thrown. The former is a thread spun from short 
strands of silk derived from waste made in raw silk reeling 
establishments, as well as in subsequent handling of the 
thread in the undyed state, and from pierced cocoons 
(cocoons from which the moths, reserved for breeding, have 
emerged). Thrown silk is composed of several strands of 
the silken thread as it is reeled directly from the cocoon. 

1 Acknowledgment is due Miss M. R. Birmingham, Assistant Sec- 
retary, Silk Association of America, for reading this section. 



TEXTILE MANUFACTURING INDUSTRIES 275 

Spun silk is used more largely for weaving, while thrown 
is used in the manufacture of almost all classes of goods. 
It is roughly estimated that at the present time about 10 
pounds of thrown silk are used to one pound of spun silk. 
While a considerable proportion of the spun silk consumed 
in this country is still imported from France, Italy, 
Switzerland, with a small amount from Japan, the produc- 
tion of American mills has increased largely during the 
past 10 years. 

Up to 4 or 5 years ago it was rather customary to give 
6 per cent 10 days, 5 per cent 30 days on spun silk, e. o. m. 
terms prevailing in some cases. The terms are stated to 
have originated with one of the larger manufacturers, 
producing a great quantity of silk products, when they 
were leaders in the spun silk branch of the industry. With- 
in the last 4 or 5 years, however, there has been a tendency 
to shorten terms and to put the industry on practically 
a 10-day cash basis. The tendency was accentuated by the 
fact that the manufacture of spun silk requires considerable 
capital, much more proportionately than for weaving or 
throwing. 

The standard trade rules recently adopted by the Spun 
Silk Division of The Silk Association of America specify 
that the selling terms shall be 2 per cent 10 days, net 30 
days. All prices are f. o. b. seller's shipping point. Ac- 
counts shall be payable free of exchange in United States 
currency or its equivalent. 

Thrown silk is now sold largely by manufacturers of 
this product, and by dealers, to weaving and knitting mills. 
While the greater portion of raw silk imports are still 
handled by the manufacturers of silk fabrics, either in 
their own throwing mills or by sending to commission 
throwsters, the selling of thrown silk has grown very rap- 
idly during the past 10 years and is expected to continue. 
Terms of sale in this branch of the industry vary somewhat, 



276 THE MECHANISM OF COMMERCIAL CREDIT 

but generally are: to weavers 2 per cent 10 days, net 3 
months' trade acceptance; to knitters 2 per cent 10 days, 
net e. o. m. In some cases open accounts are carried for 60 
or 90 days. 

Sewing silk, silk twists and embroidery silks are produced 
in general by mills specializing in these products. The 
terms which are almost universally employed by these 
"small goods" manufacturers are 2 per cent 10 days 
e. o. m., net 30 days. 

Broad Silks and Biooons. — "Woven silks fall into two 
general classes : broad silks and ribbons. 

Of broad silks it is estimated for the year 1919 that 
about 60 per cent of the total output were grege goods 
(woven before dyed), 40 per cent skein dyed (dyed before 
woven). Grege goods represent such fabrics as wash 
crepes, georgettes, crepe de chines, meteors; foulards and 
radiums ; shirtings ; spun silk and cotton-filled satins ; arti- 
ficial silk-mixed goods; chiffons; cotton and wool-filled 
poplins; taffetalines. Skein-dyed goods represent such 
fabrics as taffetas, peau de cygnes, messalines, and fancies ; 
also tie silks, inclusive of Jacquarcls; and men's wear, 
upholstery, and umbrella-silks. Grege goods are freely 
sold through converters, while skein-dyed goods are largely 
marketed by the manufacturer. Converters financially 
able to do so, buy grege goods in the raw direct from the 
mill without intermediate banking or commission facilities 
on terms of net 10 days or net 10 days e. o. m. 

It has been estimated that about 30 to 35 per cent of 
the output of the silk fabrics industry is sold by manufac- 
turers to the cutting-up trade, 25 per cent to the wholesale 
dry goods trade, and 40 per cent to retailers. Jobbing in- 
creased materially during the war, as in other branches of 
the textile industry, although there is a tendency noticeable 
now to curtail this business in view of the unreliability of 
many of the smaller and newer jobbing houses. Probably 



TEXTILE MANUFACTURING INDUSTRIES 277 

40 per cent of all dress silks (inclusive of linings for 
women's clothes) goes to garment manufacturers (cutters- 
up), while about 75 per cent of all men's lining silks goes 
direct to the men's clothing manufacturers. 

Of ribbons, probably 7 1/2 per cent goes to the cutting- 
up trade, 22 1/2 per cent to the wholesaler, and 70 per 
cent to the retailer. The proportion sold to each of the 
three classes of purchasers, of course, varies from year to 
year with the trend of fashion. Thus the percentage of rib- 
bons sold to the cutting-up trade increased in 1919, due to 
the increased use of the product in tljg trimming of 
dresses. 

In June, 1912, and by revision in December, 1920, the 
Broad Silk Manufacturers Division of The Silk Association 
of America adopted a set of "rules to govern transactions 
between buyers and sellers of broad silks," to apply to 
eases not covered by specific contracts. The rules include 
the subject of terms, and recognize existing practice. The 
terms specified are 6 per cent 10 days, 60 days' dating, 
and the privilege is given to buyer of anticipating payment 
at the rate of 6 per cent per annum. Overdue bills are 
payable upon the basis of a reduction in the discount rate 
of 1 per cent for each 30 days or fraction thereof overdue, 
and after net due date are subject to an interest charge of 
6 per cent per annum. The terms, however, vary according 
to the responsibility of the purchaser, some buyers buying 
on 30 days with discount of 5 per cent, others on 10 
days, with discount of 7 per cent, and still others net 
cash, with discount of 8 per cent. Certain variations, 
of course, occur, such as the giving of a season's dating 
on sample pieces, a practice, however, which has in part 
disappeared. 

Japanese goods, as well as domestic shirtings converted, 
are generally sold on a 3 per cent 10 days, or 2 per cent 
10 days, 60 days' dating basis. Men's lining silks prior 



278 THE MECHANISM OF COMMERCIAL CREDIT 

to the war were sold to clothing manufacturers largely on 
the basis of 7 per cent 4 months' dating, or 10 per cent 10 
days, which terms were identical with those of the woolen 
manufacturers. About 4 years ago a number of specialists 
in these lining silks instituted the change to 2 per cent 10 
days, 60 days' dating, which terms are now generally 
observed. 

The trade acceptance is far from being generally used in 
the industry. While some firms are said to insist upon 
trade acceptances in all transactions, other manufacturers 
do not employ them at all. In normal times collections by 
the larger houses are made promptly within 70 days from 
date of invoice. 

In October, 1912, the Ribbon Manufacturers Division 
of The Silk Association of America adopted rules covering 
the ribbon industry. The terms specified were 6 per cent 
10 days, 60 days' dating, with anticipation permitted at the 
rate of 6 per cent per annum. This gives a discount of 7 
per cent 10 days, which in fact is specified in certain cases, 
such as for the smaller trade. Bills to the cutting-up trade, 
and to some department stores, are payable on the 10th of 
the month less 7 per cent. These terms were in general 
use prior to their formal adoption. Six or 7 years ago the 
millinery trade received a season dating of April 15 and 
October 15, on December 1 to February 1 shipments and 
June 1 to August 1 shipments respectively. Since that 
time the dating has been advanced to April 1 and October 
1, and at the present time, this season dating is granted to 
larger houses only. Terms to the smaller houses, as well 
as for shipments after the dates given above, bear the regu- 
lar terms of 6 per cent 10 days, 60 days' dating. Strictly 
millinery houses, in some cases, have obtained this season 
dating on other classes of goods also and the dating is often 
used with wholesale dry goods houses. It is stated that the 
use of the trade acceptance in the silk ribbon industry is 



TEXTILE MANUFACTURING INDUSTRIES 279 

regarded as impracticable, especially for the local trade, 
due to the small size of orders. 

Woolen and Worsted Yarns. 8 — Several estimates place 
the percentage of yarns sold through agents representing 
the mills, usually several at one time, as from 70 to 75 
per cent, the balance being marketed direct from the spin- 
ner. A certain amount of worsted knitting yarns is stated, 
however, to be handled by jobbers who deal out small 
quantities from time to time to small knitters with a few 
machines. A government survey made in August, 1918, 
showed that 86.5 per cent of the woolen yarn produced 
was used in the plants of the spinner, while of worsted 
yarn produced under the Bradford system 56 per cent, and 
of worsted yarn produced under the French system only 
28 per cent was so used. The percentages of the output 
sold were thus, respectively, 13.5, 44, and 72. The total 
output of each class was, respectively, 8,233,000, 3,349,000, 
and 1,048,000 pounds. The proportion of their yarns which 
manufacturers purchase differs also according to the type 
of product, whether knit goods or men's or women's wear. 
It has been stated that knitting mills buy all their worsted 
yarn and approximately 80 per cent of their woolen yarn. 
Weavers of men's wear buy approximately 40 per cent of 
their worsted yarn and 15 per cent of their woolen yarn, 
while weavers of dress goods buy approximately 60 per cent 
of their worsted yarn and 90 per cent of their woolen yarn. 

Terms vary somewhat. The regular terms on both 
classes of yarns are 2 per cent 10 days, net 60 days, but 
some manufacturers give a discount of only 1 per cent. 
Two per cent 10 days e. o. m. has become quite a general 
practice, in particular for the underwear and hosiery trade. 
The men's wear trade generally receives the regular terms, 
while sweater manufacturers endeavor to purchase on 

•Acknowledgment is due Mr. Melbourne Smith, Managing Editor, 
Daily New® Becord, for reading this section. 



280 THE MECHANISM OF COMMERCIAL CREDIT 

terms of 2 per cent 10 days, 60 days extra, which extreme 
terms are given on shipments to some western knitters. 
The sweater manufacturers' association passed a resolu- 
tion, in 1920, in favor of such terms. The spinners' 
association has opposed granting them, and endeavored 
during the war to standardize terms on all classes of yarns 
at 2 per cent 10 days. It was found, however, that tradi- 
tionally different classes of purchasers had always had 
different terms, and certain factors were not in sympathy 
with the effort. On the whole there have been no ma- 
terial changes in terms during the last decade. Collec- 
tions are stated to have been more prompt than for- 
merly, and a greater percentage of manufacturers take 
the discount, although the sweater trade tends to be some- 
what slow. 

Piece Goads. — These products are divided into two 
principal classes: men's wear and women's wear. More 
women's wear passes through commission houses than 
is the case in men's wear, but both classes are sold more 
largely at the present time through mill agencies than 
through commission houses. Few of the old line commission 
houses remain, most of the so-called commission houses own- 
ing their own mills. Sales are made to two classes of 
purchasers: the cutting-up trade and the over-the-counter 
trade. The former is typified by the clothing manufacturer, 
the latter by the jobber and retailer. The proportion, in 
particular in women 's wear, which is sold to the two differ- 
ent types varies according to the current style. Thus the 
prevalence of soft-draped effects increases the over-the- 
counter trade, while the prevalence of close-fitted styles in- 
creases the ready-to-wear business and thus the proportion 
of the output sold to the cutting-up trade. Jobbing in- 
creased greatly during the war period, due to the scarcity 
of goods. The jobber not only figured as a regular link in 
the distributive chain between manufacturer and retailer or 



TEXTILE MANUFACTURING INDUSTRIES 281 

tailor, but also in a trading capacity, and the same piece of 
goods frequently changed hands 5 or 6 times before passing 
into actual consumption. The industry is distinctly season- 
al, and men's wear lines generally open in January to Feb- 
ruary for heavy-weight fabrics and July to August for light 
weights. Large manufacturers of staples and semi-staple 
dress goods generally open a month or so later, and a num- 
ber of small manufacturers of fancies open their lines no 
earlier than do the jobbers, namely, 2 or 3 months after 
manufacturers' openings. "Hand-to-mouth" buying pre- 
vails to a larger extent on women's wear, due to greater 
style risk. 

It is stated by one authority that, prior to about 1893, 
the terms were uniformly 10 per cent 10 days, 9 per cent 
30 days, 8 per cent 60 days, or 7 per cent 4 months, with 
season datings of June 30 and December 31. Whereas pre- 
viously practically all woolen goods had been distributed 
through the old-fashioned commission houses, in that year 
the present system of separating the merchandising and 
financial ends of the distribution of woolens began, and the 
largest of the old commission houses gradually dropped the 
merchandise end of the business and confined themselves 
to acting as factors. At the same time gradual shortening 
of the long dating originally given by the old commission 
houses was taking place. Little agreement, however, exists 
as to the details of this movement, but the change is said 
to have been particularly marked about 1912. At that time 
there was a movement of manufacturers away from com- 
mission houses, and these mills in large part employed terms 
of net 30 days. Other manufacturers, however, continued 
to employ the regular terms of 7 per cent 4 months in 
general, with optional discounts of 10 per cent 30 days and 
to a lesser extent 8 per cent 60 days or 90 days, and with 
season datings, such as May 1 and November 1, June 1 and 
December 1, or January 1 and July 1. The season dating, 



282 THE MECHANISM OF COMMERCIAL CREDIT 

it should be noted, however, does not lengthen the terms 
as much as may appear at first sight, for deliveries are not 
made immediately after the mill's selling season, but rather 
adjusted to the buyer 's needs, and thus January sales may 
only be delivered in June and July sales in December. An- 
ticipation is generally permitted at the rate of 6 per cent 
per annum. Many manufacturers, however, gave no dating, 
and sold upon straight terms of 7 per cent 4 months, while 
other houses sold on terms of 10 per cent 30 days, often 
granting e. o. m. terms. During the war there was consid- 
erable shortening of terms as a result of the existence of 
a seller's market, so that, after 1917, the dating was fre- 
quently eliminated and terms shortened in many cases to 
net 10 days or net 30 days. Since 1920, however, there 
has been a change in the situation, as a result of the lessened 
demand for goods, and a tendency to revert to the older 
terms. 

Difference of opinion exists as to the relative length of 
terms on men 's wear and women 's wear goods. While many 
mills make no distinction in their terms on the two classes 
of goods, several authorities agree that women 's wear terms 
have never been as short as terms on men 's wear, although 
one states that they are gradually becoming the same. 
Many of the larger manufacturers still retain the regular 
terms of 7 per cent 4 months with season dating on women's 
wear, while several large houses give 10 per cent 30 days, 
with semi-annual dating. It is stated that the latter terms 
apply to the majority of carded woolens sold by the larger 
organizations for women's wear, while worsted fabrics are 
sold on terms of 7 per cent 10 days, 60 days extra, or 2 per 
cent 10 days, 60 days extra, in some cases with semi-annual 
dating. This distinction in terms is found only in the case 
of women's wear. Men's wear, in addition to being sold on 
the regular terms, with or without season dating, in many 
cases bears shorter terms, such as 10 per cent 10 days, net 



TEXTILE MANUFACTURING INDUSTRIES 283 

30 days, net 30 days e. o. m., or infrequently 2 per cent 10 
days, 60 days extra. 

Certain mills making high-grade goods employ these 
shorter terms, and it has been suggested in explanation of 
their use that such mills were in a particularly favorable 
position to select and be certain of their customers, although 
the terms have been employed for medium and low-grade 
goods also. The difference between mills employing 30-day 
and those employing 4-month terms is perhaps to be 
ascribed rather to the size of the mill or output handled by 
the selling organization, and the corresponding number of 
accounts which must be sold to take the product. On the 
other hand, shorter terms in the case of smaller mills 
may be due in some cases also to lack of ability to 
finance business on the regular basis. It should be 
noted that for the large mills which continue to adhere 
to the regular terms, the shortening of terms during the 
war was reflected in the greater proportion of their ac- 
counts which paid on shorter time instead of taking the 
full 4 months. 

Although the regular terms are 10 per cent 30 days, 8 
per cent 60 or 90 days, and 7 per cent 4 months, it is stated 
that in ordinary times the grading of terms is not permitted, 
and only substantial buyers have insisted upon optional 
terms, these buyers invariably taking advantage of the 
shorter time in order to secure the discount. The propor- 
tion of accounts taking the higher discounts of course varies 
with the level of interest rates, anticipation being less 
frequent when interest rates are high. This was noticeable 
about 1919. Terms are also adjusted to accord with the 
way in which payments are coming in to the buyer from his 
trade. On the other hand, owing to the difference in the 
credit risk, as in the case of the other textiles, some buyers 
will only be sold upon terms of 70 days, others upon terms 
of 40 days, etc. 



284 THE MECHANISM OF COMMERCIAL CREDIT 

Blankets. 9 — Unlike the men's wear and dress goods 
branches of the industry, which are largely concentrated 
in certain of the New England and Middle Atlantic States, 
there are a large number of small blanket mills widely scat- 
tered throughout the country, catering to the local trade. 
Most woolen blankets are sold through com mission houses 
or agents, although a certain number of mills throughout 
the country sell direct. The latter practice is stated to be 
more common among smaller mills making low and medium 
grades of wool and wool-mixed blankets, and among mills 
in western Pennsj^lvania, in the South, and in the Middle 
West, than among eastern mills. It is estimated that per- 
haps half of the output passes through the hands of 
jobbers. 

Sales to the retail trade are generally made on terms of 
2 per cent 10 days, 60 days extra. To the jobbing trade they 
are sold for delivery, usually in June, July and August, on 
terms of 2 per cent 10 days, October 1. In many cases sales 
direct to the retailer by the manufacturer also bear a dating. 
Occasionally 3 per cent 10 days is granted, but only for 
a special purpose. Prior to about 1917, the customary dat- 
ing to jobbers was November 1, at which time it was 
changed to October 1. Collections during the period of 
great activity were extraordinarily good, but have been 
poor as business conditions have changed, and many ac- 
counts which had always previously paid promptly have 
been running somewhat behind. 

Floor Coverings} — Carpets and rugs are sold by 
manufacturers direct through their selling offices located 
in New York, or are sold through selling agents, one agent 
in several cases having the sale of 3 or 4 leading lines. It 

9 Acknowledgment is due Mr. F. H. Cabot, President, F. H. Cabot 
and Co., Inc., New York, for reading this material. 

10 Acknowledgment is due Mr. Thos. A. Fernley, Secretary-Treas- 
urer, National Wholesale Floor Covering Association, for reading this 
material. 



TEXTILE MANUFACTURING INDUSTRIES 285 

is estimated that about two-thirds of the output is sold 
to wholesale distributors and one-third to department 
stores and other retailers. The policies of individual man- 
ufacturers, of course, differ. The business is seasonal, and 
seasons open about April 1 or May 1 and October 1 or 
November 1. 

Prior to about 1916, terms were generally 4 per cent 
10 days, with March 1 and September 1 season datings, al- 
though in some cases dates as late as May 1 and October 1 
were specified. Shipments during the season — that is, from 
about March 1 to May 1, and from September 1 to Novem- 
ber 1 — bore terms of 4 per cent 10 days. About that time 
there was a general movement to make terms more uniform 
and shorter, and most manufacturers now have terms of 
4 per cent 10 days, 60 days extra. Net terms in certain 
cases are 90 days or 4 months from date of shipment. Some 
manufacturers, however, continue to give a season dating, 
while others may vary the terms somewhat, as, for example, 
4 per cent 30 days. On goods specially made to order, a 
considerable amount of which are sold through interior 
decorators, different terms are employed, 4 per cent 10 days, 
net 60 days, for example, being given. Collections in the 
industry are reported prompt wholesalers at least usually 
discounting their bills, although on special orders many 
bills run to maturity instead. The terms on carpets and 
rugs, as well as the usual methods of distribution, apply 
in general in the case of linoleum also. 

Hosiery. 11 — The two principal classes of hosiery are 
seamless and full-fashioned hosiery, which is knitted on a 
flat frame in the correct dimensions and then knitted to- 
gether. A negligible quantity of cut-up hosiery is also 
produced, which is knitted in large areas, cut up and sewed 

11 Acknowledgment is due Mr. E. L. P. Reif sneider, of the National 
Association of Hosiery and Underwear Manufacturers, for reading 
this section. 



286 THE MECHANISM OF COMMERCIAL CREDIT 

together. It was estimated in 1915 that 90 per cent of the 
total output consisted of seamless hosiery. 12 There has 
been a change in the character of the material employed. 
Thirty-five years ago woolen and merino hosiery was in 
universal use, but has been superseded by cotton, which 
now forms the bulk of the output. The output of silk 
hosiery, however, is increasing greatly. Formerly hosiery 
manufacturers sold entirely to jobbing houses, and at pres- 
ent the greater part of the output is still distributed 
through that channel. Data obtained in 1915 in the above 
study from 73 mills showed that a little more than 50 per 
cent of the total output was sold to jobbers, slightly less 
than 5 per cent through commission houses, and slightly 
less than 45 per cent to retailers, the quantity manufac- 
tured for export being negligible. Estimates received from 
various authorities, however, place the percentage of direct 
sales to retailers considerably lower, in general at from 
20 to 35 per cent of the output. The present tendency 
toward sales direct to the retailer is found mostly among 
manufacturers of silk hosiery, most of whom, however, also 
produce other types, notably mercerized and fine-gauge 
cotton goods. This tendency is also found particularly in 
the West, where the greater part of the business is stated 
to be so done. In the East and South, however, manufac- 
turers still depend principally upon the jobber or commis- 
sion house as a means of distribution. 

It is stated that 15 to 20 years ago many manufacturers 
sold upon what was termed a regular basis, namely 6 per 
cent 10 days, 60 days extra. At present, however, there 
appears to be little standardization in terms of sale in the 
industry, although the National Association of Hosiery and 
Underwear Manufacturers "has consistently advocated 
selling terms of 30 days net. ,, Each manufacturer in large 

"United States Bureau of Foreign and Domestic Commerce, Mis- 
cellaneous Series No. 31. 



TEXTILE MANUFACTURING INDUSTRIES 287 

measure has his own terms, which he applies alike to his 
entire product, in general making no distinction between 
the various kinds of hosiery. ' 

At the one extreme, a few manufacturers adhere to terms 
of net 10 days. Some quote terms of net 30 days, which it 
is said were established several years ago by a considerable 
number of manufacturers of silk hosiery, who were aided 
in enforcing these terms by the scarcity of such goods, as 
against low-end hosiery, in which a surplus existed in 1919. 
Some manufacturers quote 2 per cent 10 days, 30 days 
extra, which terms, it has been stated, have tended to be 
generally changed by the cotton hosiery manufacturers 
employing them to net 30 days. A comparatively small 
number of manufacturers quote 2 per cent 10 days, 60 days 
extra. The jobbers desire such terms, and the southern 
jobbers in addition recently requested a dating of April 1 
for spring goods and October 1 for fall goods. Jobbers 
in certain cases have received season datings, but they 
have not generally been given to retailers. The latter, 
however, have been granted e. o. m. terms in some cases. 
Pacific Coast and southern purchasers have often received 
30 days additional time. In highly competitive markets 
such as New York City, Chicago, and Cleveland, this added 
time may likewise be granted. The trade acceptance is 
stated to be little used in the industry. 

Knit Underwear. 13 — The two principal classes of under- 
wear are full fashioned, which is rather costly and is used 
mostly for infant's wear, and seamless, of which the bulk 
of the output consists. Cotton is the principal material, 
although knit underwear is also made of wool, merino, and 
silk. The output of cloth underwear is stated to be increas- 
ing more rapidly than the output of knit underwear. 

It was estimated, in 1915, that 55 per cent of the total 

18 Acknowledgment is due Mr. Roy A. Cheney, Secretary, Knit 
Goods Manufacturers of America, for reading this section. 



288 THE MECHANISM OF COMMERCIAL CREDIT 

output is sold by manufacturers to jobbers, 15 per cent 
through commission houses, 6 per cent through commission 
agents, and 23 per cent to retailers, the quantity manufac- 
tured for export being negligible. Statements received 
from various authorities, however, lead to the belief that the 
percentage sold to jobbers is now perhaps considerably 
higher. 

Several years ago terms of sale were largely 7 per cent 
10 days and 6 per cent 10 days, with season datings of May 
1 and November 1 for shipments from about February and 
July on, respectively. Sales in season carried 60 days 
extra. At present, however, little uniformity exists. The 
season dating has in large part been eliminated, and, as in 
the case of hosiery, the high discounts have given way to 
smaller ones or to net terms. Distinction is generally made 
between terms to retailers and terms to jobbers. The for- 
mer usually receive cash discounts, whereas in the case of 
the latter, terms are frequently net, while in some cases 
a higher cash discount is given the retailer. The explana- 
tion is perhaps found in the statement that collections from 
retailers are not as prompt. Terms to jobbers are generally 
also much shorter than to retailers. A further distinction 
is made at times between heavy and light weight garments. 

Present terms are net in some cases, calling for net 30 
or 60 days or net 10 days, 60 days extra, at times with sea- 
son dating. Discounts in general are small and are 1 or 2 
per cent with net terms of 30 or 60 days. In some cases 
these discounts are given with 30 or 60 days extra, making 
the bill subject to discount if paid in 40 or 70 days 
respectively. 

Laces and Embroideries. 14 — Aside from their sales to 
garment manufacturers, importers and manufacturers of 
lace and embroidery sell both to jobbers and to retailers. 

14 Acknowledgment is due Mr. David E. Golieb, Credit Manager, 
Einstein-Wolff Co., New York, for reading this section. 



TEXTILE MANUFACTURING INDUSTRIES 289 

Many houses sell only to manufacturers and retailers, and 
it is stated that the houses which also sell the jobber are 
generally better equipped to sell to the jobber and manu- 
facturer of low-end garments. The jobbers import direct 
to a considerable extent, and the number of houses doing 
purely a jobbing business is small. The heaviest shipments 
to jobbers are in November and December, purchases being 
made in advance at a desired dating. Retailers' orders are 
spread more evenly over the year. 

Up to 6 or 7 years ago there were a variety of terms. 
Stock business generally bore the regular terms of 7 per 
cent 10 days, 60 days extra, while goods to be manufactured 
or imported articles carried an extra dating. September 
to December deliveries, for example, had a due date of April 
1 to June 1. At that time a resolution was passed by the 
Lace and Embroidery Association fixing a maximum dating 
of 4 months on imported and manufactured articles. These 
terms were not, however, lived up to, and in consequence 
the resolution was rescinded. With the advent of the war, 
a resolution was passed fixing the maximum dating at 70 
days, and eliminating e. o. m. terms. This was in force 
only 6 or 7 months, as many houses did not subscribe, and 
the prohibition of e. o. m. terms was not observed. 

At the present time many importers and manufacturers 
employ the regular terms of 7 per cent 10 days, 60 days 
extra. Anticipation at the rate of 6 per cent per annum 
is permitted (on the net amount), while 8 per cent (on the 
gross amount) is given for payment within 10 days. 
E. o. m. terms are given at times, while on shipments for 
the opening of the season a dating of 30 days or more is 
still found in rare cases — a heritage from the past. Certain 
houses on the Pacific Coast receive terms of 8 per cent on 
receipt of goods, but this is rare. Terms of net 30 days 
prevail for manufacture on the material of the customer. 

During the last few years many lace and embroidery 



290 THE MECHANISM OF COMMERCIAL CREDIT 

houses have added white goods, although the total amount 
distributed through them is small in comparison with that 
handled through the regular channels. These goods bear 
terms of 2 per cent 10 days, net 60 days, or 2 per cent 10 
days, 60 days extra. Certain houses allow a season dating 
of April 1. Some houses eliminated the discount several 
years ago, making the terms net 60 days, with anticipation 
at the rate of 6 per cent per annum. Some of these goods 
formerly bore terms of 7 per cent 10 days. 

Terms are now generally well observed, although there 
is the usual small percentage of accounts which are slow 
pay. Only a negligible percentage of accounts require 
other than the usual routine attention for collection. Col- 
lections during the last few years have shown considerable 
improvement. 

The terms of the smaller domestic embroidery houses 
vary greatly, and the matter is largely a price problem. 
They are, however, generally short, as such houses have 
little cash, and 8 per cent 10 days or 10 per cent 10 days 
may be given. 

Wholesale Dry Goods. 15 — Dry goods jobbing is exceed- 
ingly complex. Many different classes of goods are handled, 
and the business of individual jobbers differs somewhat. 
Houses are of several types. (1) There are the large 
nation-wide general dry goods jobbers, located in the larger 
markets, in particular in Chicago and St. Louis and in the 
Mississippi Valley, who cater to buyers throughout the 
entire country. Larger stocks are carried, with greater 
range in quality and selection, and the volume of business 
done enables them to conduct practically a specialty busi- 
ness in each department. A large mill shipment business 
is also done, shipments being made direct from mill to 

15 Acknowledgment is due Mr. Thos. A. Fernley, Secretary-Treas- 
urer, National Wholesale Dry Goods Association, for reading this 
section. 



TEXTILE MANUFACTURING INDUSTRIES 291 

retailer. (2) There are local general jobbers, located iD 
important railroad centers, and covering a more limited 
territory. They are found in the upper Mississippi Valley, 
the central South, and on the Pacific Coast, though rarely 
in the territory accessible to New York. (3) There are 
smaller local jobbers, covering a more restricted territory, 
and found to a considerable extent in the South. The dif- 
ferences between the three types are largely in the extent of 
territory covered. In (2) and (3), however, certain differ- 
ences may also appear according to the territory in which 
the house is located, and a corresponding difference in the 
character of goods handled. Thus heavier goods, such as 
blankets, nanels, and woolen underwear, play a larger role 
in the North and Northwest, and these items carry a later 
dating than do the regular items. Likewise, it has been 
suggested that eastern houses have a larger percentage of 
their business in finer and more expensive goods in which 
the style factor plays a larger part than is the case in other 
sections of the country. Most eastern jobbers cover limited 
territories, and their customers are in close proximity to 
the market, so that most of their buying is done in the 
market and from open stock, whereas in the West sales for 
future delivery play a larger role. 

The various items which are handled may be classified 
as follows: Piece goods, notions, white goods and linens, 
ladies' ready to wear, men's furnishings, hosiery and under- 
wear, and floor coverings. Leading houses will have 
departments organized along these or other general lines, 
although the plan of departmentalization may differ greatly 
from house to house. For the present purpose, another 
classification which should be noted is that into staple and 
fancy items, cotton piece goods, for example, being of both 
descriptions. It may be remarked, however, that the vol- 
ume of piece goods handled has decreased greatly over a 
period of years, 



292 THE MECHANISM OF COMMERCIAL CREDIT 

As in other leading jobbing lines, great interest has been 
displayed in the terms upon which merchandise is pur- 
chased, and both of the leading associations have considered 
the matter, though from somewhat different points of view. 
The National Wholesale Dry Goods Association has con- 
sidered primarily the adequacy of the cash discount or cash 
premium allowed on separate articles. Its several divisions, 
in particular the Jobbers Association of Notion Buyers, have 
regularly communicated in the past with manufacturers 
whose discounts, both cash and trade, were unsatisfactory, 
or who announced a decrease in or elimination of the same. 
The Southern Wholesale Dry Goods Association has con- 
sidered rather the question of a uniform set of terms to 
apply to all purchases. It has favored "a minimum cash 
discount of 2 per cent, with minimum dating of 60 days on 
all commodities. ' ' After the opening of the war period the 
problem assumed new importance as a result of the cur- 
tailment of terms and decrease of discounts by houses 
selling the jobber. Thus, it is stated that 10-day terms 
were frequently quoted or, where 60 days was still given, 
such a high rate of anticipation was attached as practically 
to force payment within 10 days. Coupled with this was 
the demand that the wholesaler take goods far in advance 
of the season for immediate payment. While this was due 
in part to the efforts of purchasers to obtain advance de- 
liveries for fear of later shortage, the effect was to force 
wholesalers in many cases to finance several seasons' goods 
at the same time, thus financing two-thirds their business 
within two months. The situation was aggravated by the 
billing of goods by mills prior to delivery to the transporta- 
tion company, in the event of embargoes or refusal of the 
carrier to receive the goods. The wholesaler himself found 
it necessary to continue to carry the retailer, and his 
regular terms on the whole showed relatively little change. 
"Summed up briefly," then, it was stated in 1920 that 



TEXTILE MANUFACTURING INDUSTRIES 293 

1 i the wholesale dry goods house is to-day bearing both the 
burdens of the manufacturer and of the retailer. ' ' 

The Southern Wholesale Dry Goods Association alone has 
taken formal action in adopting a set of maximum terms 
upon which it is recommended that goods be sold. After 
discussion at each of its previous conventions, in 1915 
terms were adopted at Nashville of 2 per cent 10 days, net 
30 days, with dating of October 1 and April 1 for shipments 
after June 1 and January 1, respectively. Intermediate 
shipments carried 60 daj^s extra, net 90 days. In 1916 
and 1917, these terms were reaffirmed, and in the latter 
year an interpretation was added, stating that June to 
July and January to February shipments carried the season 
datings, while shipments during August to December and 
during March to June carried the terms for intermediate 
shipments. At these conventions the members practically 
universally expressed satisfaction with the terms, and in 
a considerable number of cases favored the adoption of 
even shorter terms. It has been stated that more than 90 
per cent of the membership were making terms less than 
the maximum outlined in the Nashville resolution. 

The feeling in favor of shorter terms resulted in a re- 
vision in 1918 at the New Orleans convention. The 10 days 
on season shipments were omitted, making terms on season 
bills 2 per cent October 1 and April 1, and due net Novem- 
ber 1 and May 1. Intermediate shipments carried terms 
of 2 per cent 10 days, net 60 days but exception was made 
of department stores, which were to be granted 60 days 
extra on such shipments. The latter concession, which was 
intended to be used merely where competition forced the 
naming of such terms, seemed, however, to have been ' ' mis- 
understood, misinterpreted, and generally has caused con- 
fusion and dissatisfaction," to quote the report of the 
committee on terms at the 1919 convention. Accordingly 
the committee, while recommending the same season terms. 



294 THE MECHANISM OF COMMERCIAL CREDIT 

favored 2 per cent 60 days on intermediate shipments, but 
strongly recommended that bale goods and all intermediate 
shipments of other goods as far as possible be billed on 
terms of 2 per cent 10 days, net 60 days. The longer terms 
on intermediate shipments were specified in view of the 
fact that certain of the members had previously employed 
them, and they also were felt to be necessary to enable 
those coming in contact with the larger markets to meet 
these terms. An unsuccessful effort was made by certain 
members so situated, to reinstate the 10 days which the 
New Orleans terms had withdrawn. It is understood that 
there has been no subsequent change in the formal terms. 

The several territorial divisions of the association have 
also interested themselves in the subject and have passed 
resolutions indorsing the recommended terms, as well as 
made recommendations to the association's committee on 
terms. In 1919, a large majority of eastern Tennessee 
houses were reported to have terms of 2 per cent 30 days, 
net 60 days, and on sales to department stores 2 per cent 
60 days, net 90 days. West Virginia houses, which had 
first adopted terms of 30 days extra, 2 per cent 10 days, 
net 60 days, in consequence of subsequent adoption of 2 
per cent 10 days, 60 days extra, net 90 days, by outside 
jobbers, recommended the adoption of such terms. Terms 
have also been adopted locally in certain cases, Cincinnati 
houses, through their association in 1918, adopting terms 
similar to those of the Southern Wholesale Dry Goods Asso- 
ciation. 

The matter of terms of sale has been discussed at many 
of the conventions of the National Wholesale Dry Goods 
Association. Complaint has been made at various times of 
the tendency of purchasers to deduct discounts when run- 
ning somewhat beyond the discount period, as well as to 
endeavor to deduct discounts and add interest instead 
when taking longer time, such as, for example, with terms 



TEXTILE MANUFACTURING INDUSTRIES 295 

of four months or with note settlements. In 1913, it was 
suggested by several members that formal action be taken, 
but nothing was done. In 1914, the necessity of curtailing 
season datings in order to afford an increased margin of 
profit was emphasized. The old datings were largely con- 
tinued by jobbers, although they had been eliminated by 
manufacturers. Jobbers' cash discounts were stated not 
to differ much from manufacturers' although some jobbers 
had eliminated the old regular terms and employed net 
terms instead. With the pronounced shortening of terms 
by manufacturers during the war, increased stress was 
placed upon the necessity of a corresponding shortening in 
jobbers' terms. Additional emphasis was lent by the 
steadily rising cost of doing business. The adjustment of 
terms on each line exactly to correspond with manufac- 
turers' is not, however, possible in all cases, inasmuch as 
jobbers' terms are in many cases the same for all kinds of 
a general type of goods. At the 1918 meeting various 
houses cited instances of shortening of terms, such as mov- 
ing the season dating forward one month from May 1 and 
November 1 to April and October 1, elimination of 60 days 
extra, and of 10 days time on season terms, and use of net 
10 days in place of 2 per cent 10 days. 

General agreement, however, existed as to the undesira- 
bility of concerted action, and this was reiterated at the 
meeting held in July, 1918, the " consensus of opinion being 
that a nation-wide uniform set of terms would not be pos- 
sible for all sellers of dry goods, underwear, hosiery, 
notions, and kindred goods." At the meeting earlier in 
the year, the secretary had been instructed to collect the 
terms of members, which was done. While great variety 
appeared, the compilation showed a decrease in the time 
given and a tendency to closer terms. It was stated to be 
"a proven fact that the ' terms situation' was in better 
shape than at any previous period," and that "the im- 



296 THE MECHANISM OF COMMERCIAL CREDIT 

provement might reasonably be expected to continue." 
While there was an effort at further shortening, terms at 
present, however, are stated to be substantially on the same 
basis as indicated in the survey. 

We may proceed to examine in greater detail the terms 
of the 135 houses which are given in this survey. The 
general terms are 2 per cent 10 days, 60 days extra, for 
many years recognized as the regular dry goods terms. 
While in many cases no terms beyond the 70-day period 
are formally quoted, and bills are due net after 70 days, 
in other cases net 90 days or net 4 months is frequently 
specified, though there has been a tendency toward the 
first-named net terms. Anticipation at the rate of 6 per 
cent per annum is generally permitted. This gives a cash 
discount of 3 per cent 10 days, which, in fact, is quoted by 
some houses, as well as in some cases, 1 per cent 10 days, 
net 30 days. Season datings most frequently specified are 
April 1 and October 1, in general for shipments made prior 
to 2 months before the dating, thus being February 1 and 
August 1 for the datings given, after which time the regu- 
lar 60 days' extra terms are given. Certain houses, how- 
ever, employ other season datings, in particular May 1 and 
November 1, for the general line, while several instances of 
earlier datings, such as February 1 and March 1 and 
August 1 and September 1, were also noted. Orders bear- 
ing the season dating, in general, carry no further dating, 
although in certain cases 60 days extra was also given, 
mainly by houses having the earlier season datings and 
practically nullifying the same. 

In all sections houses are found which do not employ 
the regular terms or which have no season datings. In 
part this is the result of a shortening of terms in recent 
years, while in part it is a reflection of the character of 
business done. Some houses give merely 30 instead of 60 
days extra on new accounts, while others eliminate the 



TEXTILE MANUFACTURING INDUSTRIES 297 

10 days of grace on season datings. Jobbers handling 
primarily special lines such as hosiery and underwear, or 
men's furnishings, follow the manufacturers' terms on 
these items in some cases. Certain markets, such as St. 
Louis and Baltimore, have been known in the past for 
their liberality in the matter of terms, but the former 
advanced the customary dating from May 1 and November 
1 to April 1 and October 1 during the last few years. 
Jobbers located at smaller centers in various sections in a 
number of cases instance the competition of a larger neigh- 
boring market as forcing the granting of 60 days extra, 
a November 1 season dating, etc. 

The extent to which houses classify their business and 
extend different terms on each class would appear to vary 
roughly to some extent with the size of the market. 
Houses located in the smaller centers in many cases have 
but one set of terms to apply to their entire business. In 
the larger markets, in particular those of the Middle West, 
distinction in general is made between spring goods and 
fall goods, factory or manufactured goods produced by 
the house itself, and mill shipments, while staples in cer- 
tain cases are also distinguished. Between these two ex- 
tremes there is wide variety, many houses having a lesser 
number of classes, and in certain sections, such as in the 
East, the entire range of types is frequently not found. 
Classification presents a twofold aspect, certain goods hav- 
ing both different discounts and net 'terms, while with 
others the difference is merely in the season dating. Mill 
shipments in general bear terms of net 30 days, although 
some houses give net 60 days or net 60 days on certain 
items only, such as towels and white goods, while giving net 
30 days on other items. Terms on overalls, work shirts, 
yarns, spool cotton and thread differ somewhat, but are 
usually 1 or 2 per cent 10 days, net 30 or 60 days, without 
season dating. 



298 THE MECHANISM OF COMMERCIAL CREDIT 

In part, classification results from an effort to shorten 
terms or reduce discounts to correspond to manufacturers' 
changes in terms with respect to certain items. Thus, cer- 
tain houses give no season dating on some items like prints, 
domestics, percales, ginghams, and sheetings, or in some 
cases only on specified brands. Some houses, in addition, 
have eliminated the cash discount, and bill these and simi- 
lar items on terms of net 60 days, while others have 
advanced the season dating one month, from April 1 and 
October 1 to March 1 and September 1. This tendency is 
also seen in connection with certain items such as hosiery 
and knit underwear, which, while frequently continuing 
to bear a season dating, in the case of many other houses 
are sold without such dating, or bear merely terms such as 
net 10 days or 1 per cent 10 days, 30 days or 60 days 
extra, similar discounts being applied also by certain 
houses in connection with the season dating. Certain items, 
however, frequently carry the later season datings of May 
1 and November 1. Among these may be noted laces and 
embroideries, white goods, cloaks, and furs (which in some 
cases carry December 1 dating), blankets, underwear 
(when a dating is given), sweater coats, and fancy knit 
goods. These items are of a twofold character, being either 
heavier goods, which will be wanted for later fall use, or 
style items. Some eastern houses report a later shipment 
date in lieu of season datings, while some houses extend 
additional time on shipments to more distant territories. 

Collections naturally vary with the different seasons of 
the year, payments being concentrated largely in the spring 
and fall. As fall sales are heavier than spring sales, they 
are heavier in the fall, this being noted alike for each of 
the various parts of the country. In certain agricultural 
sections this will be accentuated by the fact that accounts 
are carried to some extent until the fall. The movement of 
merchandise with the majority of wholesale dry goods 



TEXTILE MANUFACTURING INDUSTRIES 299 

houses is about 40 per cent in the first 6 months of the year 
and 60 per cent in the last 6 months. 

The following figures show the proportion of their total 
annual receipts received by 3 houses during each month of 
the year. It should be noted, however, that the data are 
not strictly comparable, inasmuch as the terms of the 
houses differ somewhat: 





Jan. 


Feb. 


Mar. 


Apr. 


May 


June 


New England* 


7.0 
5.6 
6.0 


5.6 
5.0 
6.1 


6.5 
5.4 
5.1 


7.4 
7.0 
6.1 


8.3 
7.0 
6.6 


8.3 


Northwest 


5.7 


North Pacific Coast 


6.6 




July 


Aug. 


Sept. 


Oct. 


Nov. 


Dec. 


New England* , 


7.7 
6.6 

7.8 


7.5 
7.0 
7.9 


8.4 

8.7 

10.8 


9.5 
12.0 
13.8 


11.5 
18.0 
11.8 


12.3 


Northwest 


12.0 


North Pacific Coast 


11.5 



* Another New England house also notes that payments drag from 
about Jan. 15 to Mar. 15 and from July 1 to Sept. 1. 

A leading authority states that on an average about 50 
per cent of the accounts of retailers with wholesalers are 
discounted, and about 20 per cent are anticipated at the 
usual anticipation rate of 6 per cent, dependent upon 
locality and trade conditions. 

Interest has been displayed in the trade acceptance by 
both trade associations. The national association has sent 
out considerable descriptive literature, while the 1918 con- 
vention of the southern association adopted a resolution 
favoring it, and several members who were employing it 
reported themselves well pleased with it. At the 1919 
convention, 20 members present at one of the meetings 
stated that they used acceptances. On the whole, however, 
as in other jobbing lines, the instrument is not used by 
the majority of houses. 



300 THE MECHANISM OF COMMERCIAL CREDIT 

Men's Wear Woolen and Worsted Jobbing. 16 — As is the 

case with goods for women's wear, woolens and worsteds 
for men's wear find their way into consumption via one 
of two channels — the jobber who sells to the small tailor 
and the ready-made clothing manufacturer. The latter 
industry developed earlier than did the women's ready- 
made industry, which consequently has drawn most of its 
forms and methods of operations from it, and a greater 
portion of men's clothing is factory made. In 1900, the 
output of men's clothing as a factory product was already 
valued at twice the custom product. The number of 
factory-made garments would be even greater, for the rela- 
tively higher priced garments are made by the tailor. 

The jobbers of men's wear woolens and worsteds and 
tailors' trimmings are of two principal kinds. Due to the 
scarcity existing in the cloth markets during the war and 
the great number of resales, the class of traders existing 
alongside of the so-called "old-line" jobber assumed par- 
ticular importance in this branch of the textile industry 
also. The principal markets in which trading occurs are 
New York, which is by far the largest, Boston, Phila- 
delphia, and Chicago. With such concerns terms vary 
greatly, and the question is largely a price problem. A 
large percentage, however, sell on terms of net 30 days, 
although spot cash or net 10 days, net 60 days, and net 4 
months are also given. Some houses of this description 
note a decrease in the length of terms during the past few 
years, such as from 4 months to 60 days and from 60 days 
to 30 days. 

The old-line jobbers, through their association, in Janu- 
ary, 1918, adopted a resolution effective March 1, 1918, 
in favor of terms of 7 per cent 10 days, 6 per cent 30 days, 
5 per cent 60 days. Invoices were to be dated ahead about 

18 Acknowledgment is due Mr. Frank C. Kay, Secretary-Treasurer, 
National Woolens and Trimmings Association, for reading this section. 



TEXTILE MANUFACTURING INDUSTRIES 301 

2 months, December deliveries thus bearing February 1 
dating, with the exception that January-February deliv- 
eries bear April 1 and July -August deliveries bear October 
1 dating. Bills are due net in 4 months after the dating, 
and are subject to an interest charge of 6 per cent per 
annum thereafter. The same rate of interest is allowed for 
anticipation. On goods sold at net prices, usual terms are 
net cash 10 and 30 days. Goods shipped to Pacific Coast 
territory may bear longer dating, April 1 on December 
shipments, October 1 on June shipments, and 30 days extra 
on shipments during the other months. Although the 
matter of terms had been frequently discussed, no action 
had been taken prior to 1918, and no uniform regular terms 
existed, although the terms which were adopted at that 
time, namely 7 per cent 10 days, 6 per cent 30 days, and 5 
per cent 60 days, had been previously in general employed. 
In addition, there are book houses who put up sample 
books of the fabrics which they have purchased from the 
mills. The tailor displays the book to his customer, who 
selects the style he desires, and the tailor then orders a suit 
length of the style from the book house. There is stated 
to be little difference in the relative strength of the book 
house and the regular jobber as a link in the distributive 
chain in the various sections of the country. Certain book 
houses combine jobbing with their regular business to a 
greater or lesser extent. The customer of the book house 
requires little credit, due to the fact that he shifts to it 
the burden of stocking the goods. In consequence, a large 
portion send cash with order or accept C. O. D. shipments, 
while some remit on receipt of goods or when sending the 
next order, and others receive 10 days, e. o. m. terms or 30 
days. The same principle underlies the granting of time 
as in the case of proximo terms, namely to group invoices 
in case of frequent shipments, and thus also to avoid the 
annoyance incident to C. O. D. shipments. Orders for large 



302 THE MECHANISM OF COMMERCIAL CREDIT 

quantities of material bear 30 or 60 days, and only rarely 
are longer terms extended, such as 90 days in the case of 
orders for stock. For years a discount of 7 per cent has 
been granted, but this was abolished in certain cases in 
1919. 



CHAPTER XV 

THE APPAREL AND LEATHER INDUSTRIES 

The present chapter considers two groups of industries 
dealing with products destined for consumption rather 
than for industrial use. The first group includes ready-to- 
wear apparel of various kinds; the second group, tanning 
and boots and shoes. In both these groups of industries, 
the distinctive wholesaler plays relatively little part. Just 
as in the apparel lines as a whole the distributive chain 
runs from cloth manufacturer to garment manufacturer 
to retailer, so in the leather industry it runs from tanner 
to shoe manufacturer to retailer. 

In both these groups of industries the same general fac- 
tors chiefly govern terms as were noted at the opening of 
the previous chapter. In all the apparel lines, other than 
women's outer garments, season datings or extra datings 
which approximate them, are customary, while in the 
leather group they are usually found in the case of shoes. 
These datings are twofold — spring and fall, and run from 
approximately April 1 to July 1, and from October 1 to 
January 1. Tanners, however, do not grant them, and the 
same is true of tailors to the trade who make garments 
only as needed. 

A second factor influencing terms in these industries is 
the large number of individuals who possess little capital. 
As a result terms lack uniformity in many cases and, 
especially in the apparel lines, have a tendency to vary 
according to market conditions at the moment, and accord- 
ing to the relative strength of buyer as compared with 
seller. 

303 



304 THE MECHANISM OF COMMERCIAL CREDIT 

The discounts allowed in the various apparel lines are 
usually high, corresponding to those indicated in the previ- 
ous chapter. Thus men's clothing carries terms of 7 per 
cent 10 days and millinery terms of 6 per cent 10 days, 
both with season dating. Another distinctive feature is 
the fact that graded discounts are often found. In the 
tanning industry discounts are lower, and range from 4 
per cent ©n sole leather to 5 per cent on upper leather. 
Shoes on the other hand carry a discount of only 1 or 2 
per cent on sales by wholesalers, although manufacturers' 
terms vary greatly. 

Men's Clothing. 1 — Manufacturers of men's ready-to- 
wear clothing may be divided into several classes. The 
first distinction is between makers of trade-marked clothing 
and makers of clothing unidentified by either trade-mark 
or label. The former feel to a greater extent the desira- 
bility of greater concentration of work under their direct 
supervision, and the large inside factory is in fact on the 
increase everywhere but in New York. On the other hand, 
particularly in that center, the system of contracting is 
still largely employed. Between the two, the medium-sized 
house, it is felt in some quarters, is being driven out, due 
to the disadvantages inherent in its competition with both 
the small manufacturer on low grade and the large manu- 
facturer on better grade garments. The capital of the 
typical cutting house is small as compared with its turn- 
over and in consequence ' ' the whole structure rests on the 
ready saleability of the cutter 's product, " 2 the chain ex- 
tending from retailer through cutter to manufacturer of 
cloth. 

As is well known, the industry is distinctly seasonal, 
although during the past 4 years activities have continued 



1 Acknowledgment is due Mr. Philip Hamburger, Jr., Treasurer, 
Henry Sonneborn and Co., Inc., Baltimore, for reading this section. 
a Cherington, The Wool Industry, (Chicago, 1916), p. 204. 



THE APPAREL AND LEATHER INDUSTRIES 305 

to a greater extent over the entire 12 months. The dura- 
tion of the spring season is from about November 15 to 
May 15, the cloth being bought during the previous June, 
July, and August, and the salesmen soliciting orders dur- 
ing September, October, and November. Deliveries are 
generally made after January 1, being heaviest in Feb- 
ruary and March, and re-orders follow in the spring. The 
cloth for the fall season is bought in December, January, 
and February, orders are received during March, April, 
and May, and deliveries are heaviest in August and Sep- 
tember. Little, in particular in the higher-priced lines, is 
made for stock. 

There is no standardization of terms in the industry. It 
has been the practice for the manufacturer to date ship- 
ments ahead, so as to permit the retailer to dispose of part 
of his purchases before being required to pay the manu- 
facturer. Thus up to recent years terms were mostly 9 
per cent for cash within 10 days, or 7 per cent 10 days, 
with December 1 dating on fall goods and June 1 dating on 
spring goods. In certain cases, however, the dating was 
November 1 or November 15 on fall goods and May 1 or 
May 15 on spring goods. Some houses have distinguished 
further between different classes of goods, suits, for ex- 
ample, being dated November 1 and overcoats December 1, 
or May 1 being specified on spring goods and June 1 on 
distinctly summer goods. Late shipments, for example, 
after April 1 or April 10 on spring and October 1 or 
October 10 on fall goods, in many cases bore terms of 7 per 
cent 10 days, 60 days extra, or 7 per cent 60 days. Tradi- 
tion in the industry sanctioned terms of 6 per cent 30 days, 
5 per cent 60 days, and net 4 months. In some eases, how- 
ever, 7 per cent 10 days, 5 per cent 30 days, and 4 per cent 
60 days was given. Some manufacturers have considered 
accounts as due net at the close of 90 days. Other manu- 
facturers, although permitting 30 days or longer settle- 



306 THE MECHANISM OF COMMERCIAL CREDIT 

merits with correspondingly reduced discounts, have given 
formal terms of only 7 per cent 10 days, and have thus 
been able to insist upon payment of accounts of financially 
involved customers at any time after the expiration of the 
initial 10-day period. Anticipation has been generally per- 
mitted at the rate of 6 per cent per annum, but most settle- 
ments are made under the regular discount or net basis. 

During the last few years many manufacturers have 
shortened terms, although the larger number continue to 
employ the regular terms. Some have eliminated the 
dating entirely, while others have granted datings that 
would not be so far advanced in the season. Some manu- 
facturers give no terms longer than 5 per cent 30 days, or 
5 per cent 60 days without dating. There has also been a 
tendency away from the high discounts which were for- 
merly almost universal. Some manufacturers, while re- 
taining season dating terms, give only 8 per cent for 
immediate payment, others 7 per cent 10 days, and 5 per 
cent for payment on dating dates, such as June 1 and 
December 1, or specify that accounts, while bearing the 
customary 7 per cent discount at the dating period, are due 
net in 30 days thereafter. The principal controversy, how- 
ever, concerns the use of so-called "net terms." By the 
phrase is meant merely terms where the discounts are 
small, and correspond to the cash discounts generally in 
vogue in other lines. An instance is afforded by the terms 
of 2 per cent 10 days, net 60 days, without season dating, 
now employed by certain manufacturers. Other houses 
employing these terms give datings, such as April 1. The 
use of such terms at times when making quantity sales to 
large dealers is also noted. A study made several years ago 
states that some high-grade clothing is sold on net 10-day 
terms, 3 and some manufacturers give terms of net 10 days 

3 Bureau of Foreign and Domestic Commerce, Miscellaneous Series 
No. 34. 



THE APPAREL AND LEATHER INDUSTRIES 307 

with July 1 dating on summer clothing. Close-out sales 
are made either on a spot cash or net 10 or net 30-day 
basis. Several houses which had adopted shorter terms are 
reported to have gone back to the longer terms in 1919. 

The subject of standardization of terms has been dis- 
cussed for some time by committees of manufacturers and 
retailers. The latter prefer standardization in the regular 
or old way, and have objected strongly to the introduction 
of net terms, which are favored by some producers. Other 
producers, however, believe that the higher discount terms 
have tended to accelerate collections. In consequence, no 
definite arrangement has been consummated. The opinion 
has been expressed that the many changes just noted in 
terms in the industry during recent years do not represent 
any real standardization, but have been made from the 
point of view of the individual house. 

Lack of rigid adherence to terms in the past was noted. 4 
Retailers, it has been said, often bought on one basis and 
wished to settle on another. The liberal credit policy fol- 
lowed, due in some measure to keen competition, encour- 
aged merchants who were inexperienced and possessed 
inadequate capital to engage in the retailing of clothing. 
They then required the manufacturer 's aid in carrying the 
merchandise. On the other hand, because of the high dis- 
counts given, wrongful deduction of discounts was fre- 
quent. Thus some retailers expected to give notes bearing 
interest at 6 per cent per annum, while obtaining the full 
cash discount, and succeeded in obtaining such concessions 
from manufacturers. Up to 1921, however, collections 
improved greatly and failures among retailers have been 
few up to within comparatively recent months. The re- 

4 The material in this paragraph relative to conditions in the past 
has been taken from a paper on Datings and Discounts, read by Mr. 
Ira D. Kingsbury before the convention of the National Association 
of Clothiers, June, 1914. The paper is reproduced in the Bureau of 
Foreign and Domestic Commerce, Miscellaneous Series No, 34. 



308 THE MECHANISM OF COMMERCIAL CREDIT 

tailer did a large volume of business at high prices, while 
payments by him were stimulated through a desire to 
obtain his full allotment of merchandise. 

Trousers are made either by regular clothing manufac- 
turers, houses making also summer clothing, overcoats or 
work clothing, or by special trouser manufacturers. They 
carry either terms of 7 per cent 10 days, 6 per cent 30 days, 
and 5 per cent 60 days (stated to have been largely initi- 
ated by clothing manufacturers) or terms of net 60 days, 
with a discount of 2 per cent 10 days, or 1 per cent 10 days, 
30 clays extra in some cases. A spring dating of April 1 
or May 1 and a fall dating of September 1, October 1, or 
November 1 are generally given for January to February 
and June to July or August shipments, respectively. 

In recent years the tailor to the trade, who in a central 
factory makes clothes to measure, which are ordered 
through retailers or agents in the various sections of the 
country, has been an increasingly important factor in the 
industry. In addition to his regular business, he is often 
employed by large retailers to make up clothes after their 
own styling, just as is the regular manufacturer who does 
not feature his own name. Although found in all sections 
of the country, the tailor-to-the-trade branch is stated to 
be considerably larger in the Southwest than either the 
ready-made or merchant-tailoring branches. As is to be 
expected, it is relatively stronger in the smaller than in the 
larger centers. 

Distinction in terms is made by the tailor to the trade 
according to the credit rating of the customer. Those with 
good rating in general receive net 30-day terms, monthly 
settlement, for example, by the 10th, being permitted in 
certain cases. Some houses provide 10-day terms for pur- 
chasers of lesser rating. A deposit, such as $5 per suit 
and $1 per pair of single trousers, when placing the order, 
and C. O. D. terms are generally required in the case of 



THE APPAREL AND LEATHER INDUSTRIES 309 

those who do not have a rating sufficient to entitle them 
to credit on open account. While the larger houses do 
the majority of their business upon 30-day terms, certain 
houses are known in the trade as C. 0. D. houses and deal 
almost entirely with unrated merchants. In certain cases 
cash in advance is required, or else a guaranty, the regular 
monthly settlement being permitted in the latter case. 
Some houses allow a cash discount, such as 2 per cent 10 
days or 3 per cent cash in advance. Regular ready-made 
clothing manufacturers in certain cases sell also made-to- 
measure garments, terms being net 30 days or in some 
instances net cash. 

Jobbing in men's ready-made clothing is very small. In 
the study above referred to, data obtained from 64 manu- 
facturers showed that 98.21 per cent of the output was 
sold to retailers and only 1.29 per cent to jobbers. The 
latter are stated to be largely disappearing, except where 
they have goods made up for themselves to be sold under 
their own labels. The cheaper goods are mainly handled, 
the manufacturers of trade-marked clothing selling their 
product direct to the retailer, in general granting the 
latter exclusive agencies. Even in small-town and country 
trade, which is now their chief field of activity, their work 
is confined mainly to the sale of working clothes. A few 
jobbers also exist who dispose of slow lines for manufac- 
turers on commission, or else purchase the same outright. 
Terms of jobbers are reported to vary greatly, and no defi- 
nite statement can be made. 

Women's Outer Garments. 5 — There are several distinct 
branches in the women's garment industry. Cloak and 
suit manufacturers generally do not make skirts, although 
there is a distinct tendency for them to do so. The same 
manufacturer at times makes both skirts or suits and 

"Acknowledgment is due Mr. J. B. Bernstein, City Editor, 
Women's Wear, for reading this section. 



310 THE MECHANISM OF COMMERCIAL CREDIT 

dresses, although the large majority of manufacturers con- 
fine their attention to either article. It is estimated that 
95 per cent of ladies' waist manufacturers specialize in 
this product. There are thus the cloak and suit, skirt, 
dress, and waist branches, each of which has its distinct 
identity. In addition to the manufacturers, there are so- 
called "jobbers" or stock houses, who, however, practically 
create their own styles, furnish their own materials, and 
have their garments made up by sub-manufacturers and 
contractors. There is a pronounced trend towards stock 
houses in the cloak and suit trade, especially in New York, 
and the number of large manufacturing plants is decreas- 
ing. Contracting in the industry, while it figures largely, 
is less important than for men's wear, due to the greater 
number of small cutting concerns. 

Jobbers are found in all the larger centers where the 
manufacturers are located. New York is the largest center 
in the cloak and suit industry, its output being estimated 
in the census of 1910 at approximately 70 per cent of the 
total output of the industry, and it produces finer goods 
than other centers. Cleveland is noted for the production 
of staple articles, and Philadelphia, Boston, and Chicago 
are also large centers. St. Louis is the second largest 
center in the skirt industry. It has many jobbers, 
but no stock houses, and also has relatively few small 
concerns, as is the case in New York and elsewhere. The 
principal dress centers include New York, Chicago, Phila- 
delphia, St. Louis, Cleveland, Cincinnati, Boston, and Los 
Angeles. 

The industry differs in some important particulars from 
the men's clothing industry. There are fewer trade- 
marked lines, and the agency and branch store are not 
employed. The larger New York stores are stated to seek 
the smaller manufacturers rather than the larger factories 
for the greater part of their stock, and have a large part 



THE APPAREL AND LEATHER INDUSTRIES 311 

in the creation of their styles. The time between orders 
by the store and delivery by the cutter is very short, and 
cutters endeavor to keep goods in process of manufacture 
as small as possible, seldom getting far ahead of orders 
actually in hand. 

Sales are made to department stores, specialty shops, 
and catalogue houses. Seasons differ somewhat. Cloak 
and suit orders in New York are placed from July 15 to 
October 15 and from January 15 to about 2 weeks before 
Easter. Shipments occur respectively in August, Septem- 
ber and October, and February and March. The dullest 
months are December and June. In Cleveland, however, 
orders are stated to be taken further in advance of the 
season and deliveries made earlier. They begin about July 
1 and January 1, and are heaviest from July 15 to Sep- 
tember 15 and in February and March respectively. In 
the skirt industry heaviest sales are made in July and 
August and in January and February, heaviest deliveries 
being approximately one month later. These seasons must 
be further subdivided in view of the change in the separate 
skirt business from a staple character to the manufacture 
of novelties for sport wear, etc., which has made it neces- 
sary to carry a far larger stock. St. Louis has selling sea- 
sons running from June 15 to August 1 and from December 
1 through January and in some years through the early 
days of February, heaviest deliveries being from August 1 
to September 15 and in February respectively for fall and 
spring seasons. October, November, and December are the 
dull months in the skirt industry. 

The dress industry, except when depression is pro- 
nounced, is a 12-month industry. Dresses can be manu- 
factured in so many different weights to suit climatic con- 
ditions, that an all-year-round business results. Sales have 
become so large that for the last few seasons they have 
practically surpassed the sale of suits. Waists, however, 



312 THE MECHANISM OF COMMERCIAL CREDIT 

are seasonal to some extent, although the business is prac- 
tically continuous. Selling for the fall season occurs in 
July and August and for spring in January and February. 
Heaviest deliveries are in August and September and in 
March, April, and May, respectively. 

In New York City, the Garment Conference Council of 
Wholesalers and Retailers • adopted a resolution in July, 
1917, fixing maximum terms. This was later confirmed by 
the respective local associations of cloak and suit manu- 
facturers, dress and waist manufacturers, and garment 
"jobbers," and concurred in by various associations of 
retailers. Terms had previously been very mixed, ranging 
from net up to discounts as high as 16 per cent, and the 
abuse prevailed of deduction of excess discounts by pur- 
chasers. In the dress and waist industries 10 per cent was 
called regular. The maximum terms adopted were 8 per 
cent 10 days, 7 per cent 30 days, 6 per cent 60 days, or 
so-called "net" terms, namely, 2 per cent 10 days, 1 per 
cent 30 days, net 60 days, the price being advanced cor- 
respondingly in the former case to compensate for the 
difference in discount. A strictly net basis is also per- 
mitted, as are e. o. m. 10-day terms. The endeavor was 
first made to offer merely a 2 per cent discount, but in 
consequence of the opposition of the retailers, who favor 
a high discount (as also in men's clothing), a compromise 
was effected after about a month whereby the two optional 
sets of terms were specified. It has been stated that the 
majority of cloak and suit and skirt manufacturers selling 
low-priced garments offer only the low discount and short 
dating. Few dress and waist houses in the association 
employ the "net" or strictly net terms. The length of 
time given will vary with the individual credit risk, and 
thus some buyers receive only 30 days, etc. 

Cloak and suit manufacturers in the Cleveland market, 
however, have adopted no uniform terms, although "the 



THE APPAREL AND LEATHER INDUSTRIES 313 

consensus of opinion has been to sell as nearly as possible 
on a net basis with 60 to 90 days dating, " while at the 
same time offering a reasonable cash discount. Up to about 
10 years ago the majority of houses sold on terms of from 
7 to 10 per cent 10 days, with proportional discounts for 
payments within 60 days and 90 days. Terms now range 
from 2 per cent 10 days, net 30 days, to 5 per cent 10 
days, 2 per cent 10 days, 60 days extra, but the majority 
give terms of 4 per cent 10 days or 2 per cent 10 days, 60 
days extra. Many houses give season datings of March 1 
and September 1, the dating on suits in some cases being 
one month earlier than on coats. The difference in prac- 
tice between New York and Cleveland with respect to 
dating corresponds to the difference in practice noted above 
with respect to orders and deliveries, as there is no heavy 
purchasing in advance in New York, and goods are ordered 
for delivery when needed. 

It is stated that skirt manufacturers in New York who 
are not members of the manufacturers ' association in gen- 
eral adhere to the terms adopted by the garment confer- 
ence, although they are reported often to give extra terms. 
Prevailing terms among St. Louis houses are fairly uni- 
formly 3 per cent 10 days, 2 per cent 30 days, although 
special terms of 8 per cent 10 days to 10 per cent 10 days 
are allowed to firms of exceptional credit. Jobbers' terms 
in the main are 2 per cent 10 days, net 60 days. While 
some members of the trade claim that terms were formerly 
flat 3 per cent, but that about 6 years ago eastern compe- 
tition forced concessions during several seasons, terms on 
the whole show no great changes during the past decade. 
The city trade, which amounts to but a small portion of 
the total, receives e. o. m. 10-day terms. In other markets 
it is reported that 10 per cent 10 days is largely given. 

The standard maximum terms were not accepted by all 
New York City dress houses which belonged to the dress 



314 THE MECHANISM OF COMMERCIAL CREDIT 

and waist association. Prior to that time discounts ranged 
from 3 per cent up to as much as 16 per cent in some cases, 
while 10 per cent was called regular, as was noted above. 
Terms of houses in New York which are not members of 
the local association, as well as of houses located in other 
markets, vary greatly, and instances are found of net 
terms of 10, 3D, and 40 days, while discounts range from 
2 per cent to 8 per cent, e. o. m. terms or 30 days extra 
being given in some cases, as well as graded discounts (in 
general not over 2) such as 2 per cent 10 days, 1 per cent 
30 days, net 60 days, or 3 per cent 10 days, 2 per cent 30 
days, and special terms according to account. While many 
state that differences in terms are primarily due to the 
policy of the individual house, others distinguish between 
cheaper dresses, which are stated to be generally sold on 
shorter terms and lesser discounts, and medium and fine 
dresses. Thus one authority states the former are sold 
more largely on terms of net 10 days or 2 per cent 10 days, 
the latter on terms of 8 per cent 10 days, in some cases 
with e. o. m. terms or 30 days extra, and some extremely 
high-priced dresses on terms of 8 per cent 10 days extra 
or 7 per cent 10 days, 60 days extra. It is also agreed that 
the last few years in general have witnessed a shortening 
of terms and an abolition of the old extremely high dis- 
counts. 

Waists are generally sold on terms of 8 per cent 10 days, 
in some cases with e. o. m. terms for the better grade and 
2 per cent 10 days for the cheaper grade. It is stated 
that there is a general tendency to eliminate the 60-day 
clause. Collections on the whole are reported fairly 
prompt, payment on the average being made within 30 
days from receipt of goods. 

Fur Manufacturing. 6 — Raw and dressed furs are pur- 

8 Acknowledgment is due Mr. David C. Mills, Manager, Associated 
Pur Manufacturers, Inc., for reading this section. 



THE APPAREL AND LEATHER INDUSTRIES 315 

chased by manufacturers from importers and dealers. At 
times manufacturers import their raw materials exten- 
sively, but the great bulk of the business is done through 
dealers. Both manufacturers and dealers have their raw 
furs dressed by " dressers and dyers," who constitute a 
separate branch of the industry. The business in the past 
has been a one-season business, but in recent years the 
fashion for summer furs has given the industry two 
seasons. 

The matter of standardizing terms in the industry has 
been discussed for 10 years or more, but no formal action 
has ever been taken, and it is very generally conceded that 
the establishment of fixed rules in regard to the matter 
would be extremely difficult if not entirely impracticable. 

The prevailing terms are 2 per cent 10 days or 7 per 
cent 10 days December 1, and 2 per cent 10 days January 
1, on merchandise shipped after July 1, and 7 per cent 10 
days July 1 on merchandise shipped prior to that date. 
Houses making fine goods usually give 7 per cent 10 days 
with both datings, while houses making cheap goods give 
2 per cent 10 days December 1 and 7 per cent 10 days 
July 1. As there are more firms making cheap goods than 
fine, more goods with the December dating bear a 2 per cent 
than a 7 per cent discount. It has been suggested that the 
existence of a 7 per cent discount with the July 1 dating 
may be due to the fact that when the fur trade was a one- 
season business, special inducements were necessary to 
stimulate early orders, and these persisted even after the 
industry had assumed a two-season character. Manufac- 
turers have been in a very difficult position since 1920, 
for dealers have continued the terms of 60 days and 
dressers and dyers the terms of 30 to 45 days instituted 
during the war, while manufacturers have been giving 
long datings to retailers. 

Variations from these terms are, however, frequent. The 



316 THE MECHANISM OF COMMERCIAL CREDIT 

customer with a poor credit rating may have to take a 
lower discount, although this is not generally practiced. 
Exceptionally large discounts, such as 6, 8, 10, 12, and up 
to 16 per cent, are given in certain cases where desired by 
large retailers. Since 1920 much larger use of the trade 
acceptance by manufacturers is reported, although it is 
not by any means a general trade practice. Large use is 
made of it in the purchase of skins from importers or 
dealers. 

Prior to 1912 over 50 per cent of the total product was 
shipped on memorandum or consignment. Serious abuses, 
however, resulted, and in that year a rule was adopted in 
the trade prohibiting the practice. Shipment of goods on 
approval, to remain not longer than 3 days in the cus- 
tomer 's hands, is, however, permitted. It is estimated that 
not over 10 per cent of the product at present is shipped 
on memorandum, the greater part of which is on 3 days 7 
approval. 

Millinery. 7 — The organization of the millinery industry 
is complex. There are four principal branches. Of these the 
millinery jobbers are the chief, but the term is somewhat 
inaccurate, for many of them make their own hats, in large 
part import their specialties, and sell feathers, etc., direct 
to the retail trade. There are also hat manufacturers who 
make untrimmed and banded hats (which are made by 
machine and not by hand) and who sell almost exclusively 
to large jobbers, or in a very few cases to large retailers. 
The trimmed-hat houses manufacture trimmed hats and 
sell almost exclusively to retail dealers. In addition, there 
are specialty houses handling flowers, feathers, etc. 

The hat manufacturers who sell to the jobbers have a 
seasonal business lasting from 3 to 4 1/2 months each 
season. The trimmed-hat manufacturers have a longer 

7 Acknowledgment is due Mr. Frederick Bode, President, Millinery 
Chamber of Commerce of the United States 3 for reading this section. 



THE APPAREL AND LEATHER INDUSTRIES 317 

season, owing to the scarcity of trimmed hats, their season 
lasting about 10 months each year. At the present time 
there is an active and well-defined movement on foot, spon- 
sored by the Millinery Chamber of Commerce of the 
United States, looking toward the establishment of a 12- 
months ' business for all branches of the millinery industry, 
with a resultant sale of seasonable millinery for each sea- 
son of the year. It is stated that this movement is meeting 
with great success. 

Terms of millinery jobbers are now fairly standardized. 
First among their organizations to adopt terms was the 
Millinery Jobbers' Association in 1900, which now covers 
the territory between Columbus and Denver, and St. Paul 
and Dallas. The terms, as revised in 1910, called for a 
maximum dating of April 15 and October 15 on goods 
shipped prior to February 15 and August 15, respectively. 
On goods shipped subsequent to these dates it was optional 
with members to allow 60 days dating, the discounts being 
6 per cent 10 days, 5 per cent 30 days, and 4 per cent 60 
days from value date. Anticipation at the rate of 6 per 
cent per annum was permitted. 

Beginning with the spring season, 1918, datings were 
fixed at April 1 and October 1 for shipments prior to Feb- 
ruary 1 and August 1, respectively, while the clause relat- 
ing to goods shipped subsequent to these dates re- 
mained unchanged. The terms of 4 per cent 60 days 
were, however, eliminated, and a clause instead substi- 
tuted providing that no discount was to be allowed after 
30 days. 

One of the principal purposes in the formation of the 
National Millinery Association in the East, covering the 
Atlantic seaboard from Boston to Atlanta, in the winter 
of 1917, was to improve credit conditions, in particular in 
view of the high percentage of bad-debt losses. Prior to 
that time terms varied greatly, but most houses are stated 



318 THE MECHANISM OF COMMERCIAL CREDIT 

to have given terms of 7 per cent 10 days, 6 per cent 30 
days, with May 1 and November 1 datings. 

The datings and shipment dates fixed by the National 
Millinery Association were identical with those of the 
Millinery Jobbers' Association. Terms of 4 per cent 60 
days were, however, permitted, no discount being allowed 
after 60 days, and terms of 7 per cent 10 days e. o. m. were 
permitted. At the same time, a similar change was made 
by houses on the Pacific Coast, the datings being changed 
from April 15 and October 15 to April 1 and October 1, 
and terms being specified as 6 per cent 10 days, with antici- 
pation at the rate of 6 per cent per annum, or 7 per cent 
10 days quoted. Sixty days extra has been given on other 
than early shipments. The problems which the wholesaler 
encounters have been described as follows: "We, of 
course, would like to shorten the terms so as to make our 
accounts more liquid, but, having to deal very largely with 
women who have comparatively little capital and who can- 
not pay their bills until the season is somewhat advanced 
and they actually do business, it is useless to attempt to 
make them pay their bills on shorter terms. We receive 
our money from them as soon as they begin to do business. 
If the season is early, we get our money early. When the 
season is late, it comes in late, no matter what the terms 
are." 

The hat manufacturers have terms, which have been in 
effect for many years, of 6 per cent 10 days, 5 per cent 
30 days, with datings at March 1 and September 1, and no 
datings thereafter, other than e. o. m. terms in some cases. 

Trimmed-hat houses on July 1, 1917, through their 
association adopted terms of 6 per cent 10 days, 60 days 
extra, or 7 per cent 10 days. Terms previously in use 
were 7 per cent 10 days, 60 days extra, or 8 per cent 10 
days, and many houses are still employing these terms. 
In 1919, several millinery jobbers reported the use of net 



THE APPAREL AND LEATHER INDUSTRIES 319 

terms on trimmed hats, and a committee on discounts was 
accordingly appointed by the Millinery Jobbers' Associa- 
tion, but at the convention it was decided not to sell them 
net. 

Among the specialty items, flowers and feathers are sold 
on terms of 7 per cent 10 days, with May 1 and November 1 
dating, or 10 per cent 10 days e. o. m. 

The trade acceptance is little used in the industry. It 
was adopted in June, 1919, by the Raw Ostrich Feather 
Importers' Association, for use where requested by the 
seller on all accounts not liquidated by the 10th of the 
month following purchase, terms being 10 per cent 10 days 
(e. o. m. in some cases), 9 per cent 30 days, 8 per cent 60 
days, 7 1/2 per cent 90 days, 7 per cent 4 months. This 
association urged the use of trade acceptances in a letter, 
in 1919, to the Millinery Jobbers' Association, but the 
latter did not deem them practical for the millinery busi- 
ness at that time. Millinery braids were sold to millinery 
jobbers and hat manufacturers upon terms of 6 per cent 
10 days, with datings of April 1 and October 1, but practice 
as to payments is said to have been very lax. On March 1, 
1920, purchasers were advised that the season dating would 
be eliminated, and terms would be 8 per cent 10 days e. o. m. 
or 6 per cent 10 days e. o. m., 60 days extra, but the effect is 
stated to have been nullified through instructions given by 
customers to ship goods on January 1, making due dates 
and discounts 8 per cent February 10, or 6 per cent 
April 10. 

Tanning. 8 — The tanning industry is very complex. 
There are two principal branches. Sole-leather manufac- 
turers confine themselves largely to this branch, although 
they also produce belting and harness leather to some ex- 
tent. There is a greater diversity in methods of tanning 

8 Acknowledgment is due Mr. E. A. Brand, Secretary, Tanners' 
Council, for reading this section. 



320 THE MECHANISM OF COMMERCIAL CREDIT 

tipper leather and a tendency to specialize on making cer- 
tain classes and grades. 9 The product is more varied, due 
to a wider range of uses, and there is a larger num- 
ber of kinds of raw material. In addition to produc- 
ing the various types of upper leather, a few tanners 
also include in their production bag and case, glove, 
fancy, and book leather. Most sole-leather tanners have 
a standard product for which there is a steady sale, 
consequently they produce considerable stock in advance 
of orders. 

Leather is largely sold direct by the tanner to the manu- 
facturer of leather products. Estimates place the propor- 
tion of leather sold direct at over 75 per cent of the total 
output, these figures including sales by tanners through 
associated houses and subsidiary companies. Although the 
majority of firms from whom data were received indicate 
no change in distributive methods during the past decade, 
some tanners report an increasing tendency to sell direct 
instead of through selling agents. The amount passing 
through the hands of leather dealers is very small. They 
are employed more largely in cleaning up job lots and in 
distributing to the smaller manufacturer. While consid- 
erable upper leather is sold on consignment, it is under- 
stood that a large quantity is sold outright. Commission 
merchants in recent years are stated to be to a considerable 
extent becoming direct owners of tanneries, and also hide 
importers and dealers. During the war period a consid- 
erable increase was noted in the number of small specula- 
tive jobbers. Among jobbers, the "finders" are an impor- 
tant class, cutting up the stock and selling the smaller 
finder, cobbler, or shoe-repair man who is limited in his 
means, and carrying the large number of articles, such as 
thread, machine parts, rubber heels, etc., which he re- 

9 Certain of the data contained in this article have been taken from 
Onthank, The Tanning Industry (Detroit, 1917). 



THE APPAREL AND LEATHER INDUSTRIES 321 

quires. 10 Leather belting is sold almost entirely direct by 
tanners to the manufacturers. 

The tanning industry has no marked seasonal aspect. 
One tanner states that purchasing depends largely upon 
market conditions, business being unusually good when 
prices are firm and advancing, while less buying occurs 
when prices are weak and easier. On the whole, however, 
business of the second half year is heavier than the first. 
Although most tanners who furnished data report no 
change in this regard during the past decade, some state 
that seasonal fluctuations are now less pronounced. One 
tanner states that since terms on sole leather were changed 
about 10 years ago, fixed buying periods have been largely 
obliterated. Broadly speaking, there are, of course, two 
seasons, spring and fall, with a short dull period of 
several weeks after each season. It has been stated that 
deliveries in October in general are heaviest, due to the 
fact that shoe manufacturers are stocking up for their next 
run, as well as to re-orders for midwinter trade, while 
activity is lowest about April or later. This applies more 
largely to leather used by the shoe industry, which it has 
been estimated constitutes about 70 to 80 per cent of the 
total output, 11 The demand for belting leather is not sea- 
sonal, but varies according to industrial requirements. 
When business is normal there is a steady trade all the year 
around in fancy leather. Purchases are made in the late 
winter and early spring for Easter business, and in the 
late summer and fall for Christmas business, with subse- 
quent fill-in orders, and there is considerable buying for 
advertising purposes. 

There are many variations in terms of sale in the indus- 

10 It is estimated that from 30 to 35 per cent of all sole leather 
goes from manufacturers to sole cutters and the shoe-repair trade. 

11 Data obtained by the Federal Trade Commission for the year 
1918 give the output of shoe leather as 59 per cent of the total when 
measured in square feet, and 74 per cent when measured in pounds. 



322 THE MECHANISM OF COMMERCIAL CREDIT 

try as a whole, but in each branch certain terms are recog- 
nized as regular. Standard terms for sole leather are 4 
per cent 10 days, 3 per cent 30 days, 2 per cent 60 days, 
net 90 days. A considerable number of tanners, however, 
do not quote the 90-day terms, while some also omit the 
60-day terms. Twenty days extra is largely given, or pay- 
ments permitted by a given date of the following month, 
such as the 10th or 15th, for the previous month's ship- 
ments. It has been stated that the terms of 3 per cent 30 
days are practically ignored. Certain tanners give no 20 
days extra to purchasers taking 60 or 90 days. Some 
tanners make shipments direct from the tannery instead of 
from warehouses in the larger centers, and in this case 
terms are often made cash discount for payment on arrival. 

Terms were changed some years ago, the general con- 
sensus of opinion placing the time at about 10 to 12 years. 
Prior terms were 5 per cent 10 days, 4 per cent 60 days, 
"with almost any dating a shrewd buyer would feel in- 
clined to exact under abnormal market conditions," and 
the change occurred as a result of the strain upon the 
tanner's resources. At first no 20 days extra was given, 
but this was shortly granted. It is stated by several au- 
thorities that dating is occasionally permitted at present, 
as for example, to jobbers in dull times. One tanner states 
that more recently there has been considered the question 
of reducing the discount from 4 per cent to 2 per cent, 
which was also attempted at the time the change in terms 
was carried out. 

The regular terms apply also on tanners' sales of cut 
soles, which are produced by several leading tanners (as 
well as by specialized manufacturers), and on rough belt- 
ing leather. Finished belting leather, however, bears 
terms of 5 per cent 10 days, with 4 per cent 60 days under 
special arrangement to cover long time in transit. Cut 
stock for shoe-repairing purposes bears terms of 1 per cent 



THE APPAREL AND LEATHER INDUSTRIES 323 

10 days, in some cases with 20 days extra, and in some 
cases with net terms of 30 or 60 days. A leading tanner 
engaged in the sale of cut stock to finders makes terms of 
1 per cent 10 days, net 30 days on blocks and strips, but 
quotes 4 per cent 10 days, 2 per cent 30 days, net 60 days 
on other classes of cut stock. 

Regular terms on upper leather, including glazed kid 
and patent leather, are 5 per cent 10 days, 4 per cent 30 
days. Considerable flexibility exists with reference to the 
discount period, and monthly settlement, ranging from 
the 1st to the 15th, is frequent, while in many cases 30 
days is granted. Under special agreement, with the 4 per 
cent discount, 60 days is specified in a few cases instead 
of 30 days. It has been reported that ' ' the New England 
trade usually demand and frequently obtain" such terms. 
One tanner states that "it is not so much a question of 
changing terms as making our customers live up to them, ' ' 
while another states that " terms of sale do not seem to be 
considered an obligation or contract to most of the shoe 
trade, and there is tremendous abuse in regard to the time 
taken in the payment of bills and the amount of discount 
deducted:" It has been stated that about 12 years ago 
an unsuccessful effort was made by certain tanners to 
shorten terms and reduce discounts on upper leather, while 
another states that some years ago an effort was made to 
reduce the discount to 4 per cent. While these are the 
terms on finished leather, rough leather carries only a 1 
per cent discount. 

Usual terms on harness leather are 2 per cent 30 days, 
net 60 days and in some cases net 90 days, while russet 
collar leather carries terms of 2 per cent 10 days and in 
some cases 3 per cent 10 days, net 30 and 60 days. 

During the last few years terms on glove leather have 
been shortened and discounts reduced or abolished. At the 
present time they range from net 10 days to net 30 days, 



324 THE MECHANISM OF "COMMERCIAL CREDIT 

in the latter ease often carrying a discount of 1 per cent 
or 2 per cent 10 days. It is stated that the great majority 
of fancy leather manufacturers employ terms of either 2 
per cent 10 days, net 30 days, or 2 per cent 30 days. Ex- 
ceptions noted are granting of the discount on accounts 
taking more than 30 days, the quoting of net 30-day terms 
and (by several smaller manufacturers) terms of 3 per 
cent 30 days. The latter were the general terms up to 
several years ago. Purchases by fancy leather goods manu- 
facturers from tanners producing chiefly sole leather carry 
the regular sole-leather terms of 4 per cent 10 days, 3 per 
cent 30 days. Coat leather is sold on terms of net 30 days. 
Customary book-leather terms are 2 per cent 10 days, net 
30 days, and for upholstery leather 2 per cent 10 days. 

The trade acceptance is used only occasionally in the 
industry. The individual tanner when employing it at all 
uses it only on a very small proportion of his accounts. A 
leading tanner states that "accounts not handled on a 
discount basis are not considered satisfactory," and esti- 
mates that from 15 to 20 per cent of accounts run overdue, 
although not seriously, and in a large majority of cases 
interest is added for the overtime. While many tanners 
note no difference in collections from the various classes of 
purchasers, it has been stated that "shippers generally 
regard the shoe trade as more desirable than the jobbing 
trade. " Collections from larger jobbers and finders, how- 
ever, are stated to be as prompt as collections from shoe 
manufacturers, and several tanners consider them at times 
more so, but the smaller jobbers and finders are naturally 
less prompt. Small dealers are stated to obtain their sup- 
plies mostly through larger jobbers. In the words of one 
tanner, "in most cases a jobber is trying to do too much 
business on his given capital, that is, he is endeavoring to 
buy on extended terms, sell on a cash or 10-day basis, and 
turn his capital from his customer to his source of purchase 



THE APPAREL AND LEATHER INDUSTRIES 325 

without great obligation on his part, thus causing occa- 
sional lack of ready funds, hence delayed payments." 
Several leading tanners state that some shoe manufac- 
turers at times in the early part of their season when they 
are obliged to make and hold shoes for delivery dates are 
inclined to be slower in payments than ordinarily. 

While most authorities state that jobbers' terms do not 
differ from tanners', some believe that dealers' terms are 
more liberal in the time given, although the standard dis- 
counts are the same. As jobbers sell to smaller accounts, 
which the tanners would not solicit, their collections are 
believed to be less prompt. Finders' customary terms are 
2 per cent 10 days, net 30 days, although in certain dis- 
tricts longer net terms, such as 60 days, are given. Their 
collections are stated to have greatly improved during the 
last few years with the placing of the shoe-repairing indus- 
try on a more business-like basis. 

Boots and Shoes. 12 — It is estimated that approximately 
60 per cent of the total output of shoes is distributed 
through jobbers, and, states one authority, the percentage 
would be even greater were jobbing houses owned by manu- 
facturers included. Certain manufacturers also distribute 
goods from other factories in addition to their own. In 
St. Louis in particular, there has been an increasing tend- 
ency during the past decade for manufacturers to job 
also shoes produced by other manufacturers. Practice with 
respect to sales to jobbers varies between the different 
markets, and thus in Cincinnati manufacturers in general 
do not sell jobbers, while in Rochester, where women's and 
children's shoes are produced, the proportion is estimated 
at 40 per cent. The same manufacturer ordinarily does 
not sell both wholesaler and retailer. Heaviest sales by 

12 Acknowledgment is due Mr. Louis M. Taylor, Secretary-Treas- 
urer, National Shoe Wholesalers' Association of the United States, 
for reading this section. 



326 THE MECHANISM OF COMMERCIAL CREDIT 

manufacturers are in March and April and in September 
and October, heaviest production in December to March 
and June to September, and heaviest shipments in Feb- 
ruary to April and August to September. 

Terms on which manufacturers sell vary considerably, 
instances reported ranging from net 10 days to discounts 
of 10 per cent, one manufacturer, for example, reporting 
7 per cent for payment 25 days e. o. m. Distinction is made 
by certain manufacturers between different types of sales. 
One Cincinnati house thus has regular terms on goods to 
be made up of 2 per cent 10 days, net 30 days, to retailers, 
with 30 days extra on shipments over 1,000 miles; 5 per 
cent 10 days, net 30 days, to department stores, and 6 per 
cent 10 days, net 30 days, to jobbers; while net 30 days is 
quoted on goods sold from the floor or out of stock. On 
sales to jobbers the cash discount will be stressed, whereas 
on sales to retailers the norm is largely net terms of 30 
days, as will be indicated below, although net 60 days is 
quoted by some manufacturers. 13 This is reflected in the 
difference in the percentage of wholesalers and retailers 
who take the cash discount, estimated for the Rochester 
market as 80 per cent and 50 per cent respectively. A sub- 
stantial percentage of overdue accounts is shown, several 
houses stating that 20 to 25 per cent of retailers run be- 
yond the net period. A shortening of terms is reported 
during the past decade and greater uniformity has been 
introduced. Very little use of the trade acceptance is re- 
ported by manufacturers. 

Due to the fact noted above that shoe manufacturers in 
large part also engage in jobbing, purchasing other makes 
and maintaining stocks, little attention apparently has 
been paid to the terms upon which the wholesaler pur- 

" Little differentiation is reported by manufacturers between 
terms on which they sell their own goods and those of other manu- 
facturers which they job. 



THE APPAREL AND LEATHER INDUSTRIES 327 

chases. This activity has been confined more largely to 
rubber and tennis footwear, in which a contract is signed 
with the manufacturers for the ensuing year. Canvas 
footwear and tennis shoes are billed out on a net due date 
of June 15, and fall shipments of rubber boots and shoes 
on November 1, bearing terms of 1 per cent 10 days net 
30 days. It is now being suggested that the former dating 
be changed to June 1 for retailers and July 1 for whole- 
salers. 

Prior to 1918, general terms of shoe wholesalers were 
largely net 60 days, with considerable variation in the 
cash discounts given. These ranged roughly from 1 per 
cent 10 days to 5 per cent 30 days, but averaged 2 per 
cent 10 days, in some cases with 1 per cent 30 days quoted 
in addition to the latter, for example, in New England 
largely. In the fall of that year, upon the suggestion of 
the Allied Council of the American Shoe and Leather In- 
dustries and Trades, an attempt was made to change terms 
to net 30 days, and a movement, which had considerable 
strength, developed for a discount of 1 per cent 10 days. 
The matter was discussed by both the National Association 
and the 4 constituent territorial associations, each of which 
has had for some years a committee dealing with the sub- 
ject of terms, discounts, and overdue accounts, and there 
was general agreement as to the desirability of these terms. 
Local groups have also considered the matter, and on vari- 
ous occasions there have been resolutions passed recom- 
mending certain terms. 

A survey made, in 1919, by the committee of the National 
Association, and embracing 159 houses, showed that in the 
New England, Middle Atlantic, and Middle Western sec- 
tions there was general adherenice to terms of 30 days, 
although in the South the reverse was true. Certain houses 
made terms of both 30 days and 60 days. Less uniformity 
was, however, noted on the question of discounts. While 



328 THE MECHANISM OF COMMERCIAL CREDIT 

in New England 1 per cent was customary, in the Middle 
Atlantic States 2 per cent was more frequent, due to the 
fact that Philadelphia and Baltimore houses, with few ex- 
ceptions, were on a 2 per cent basis. In the South 2 per 
cent was almost universal, while in the Middle West the 
number of houses allowing 2 per cent was considerable, 
although somewhat less than those allowing 1 per cent. 
In the South some houses reported the employment of net 
terms only, while in the Middle West more houses em- 
ployed such terms than granted a discount of 2 per cent, 
although the figure was somewhat less than those granting 
a discount of 1 per cent. As a result of its survey, the 
committee stated that "very gratifying progress has 
(apparently) been made in shortening terms and dis- 
counts." The movement continued, although exceptions to 
the terms of 1 per cent 10 days, net 30 days, were still 
found. With the exception of the South, almost all new 
accounts were already, in 1920, stated to be on a 1 per cent 
10-day, net 30-day basis. 

Turning to the several sections, since 1920 practically all 
up-state houses in New York are believed to be on the new 
basis, and some New York City houses, in fact, have quoted 
2 per cent to New York City trade and 1 per cent up-state 
and in New England. In the West terms were considered, 
in 1918, at several group meetings, the change being in- 
itiated at St. Joseph, and finally accomplished at a Chicago 
meeting. Net terms were fixed at 30 days, with 15 days 
extra for shipments of 1,000 miles or over. At the Novem- 
ber, 1918 meeting of the Western Association, data ob- 
tained showed that three-fourths the firms replying had 
adopted the 30-45-day terms, most frequent discounts being 
1 per cent, 2 per cent and absolutely net. A resolution was 
passed favoring the elimination of the cash discount and 
making the terms net 30 or 45 days, with latest shipping 
dates on white goods or low shoes April 1, as a concession 



THE APPAREL AND LEATHER INDUSTRIES 329 

to northwestern houses. While the Southern Association 
has considered the matter of terms since about 1918, the 
same success does not appear to have attended its efforts 
as has been the case with the other associations. It is gen- 
erally agreed that the change in terms has been made with 
little difficulty, and that there has been no adverse effect 
upon business. There has also been the saving in the dis- 
count, in addition to more rapid inflow of funds, and cor- 
responding reduction in bank borrowings. An aid thereto, 
of course, has been the merchandising situation in the 
industry. At the present time, there is some disposition to 
fall away from the 1 per cent 10-day discount. 

Advance orders have always been taken, although it is 
stated from New England that the seasonal aspect of the 
industry has been less marked during the last few years, 
due to active consumption and more frequent purchasing. 
Orders are taken for shipment on a given date, with the 
seller retaining the privilege of prior shipment, in which 
case the goods are billed as of the date called for in the 
order in place of date of shipment, and carry the usual 
terms. Time of shipment varies somewhat, and likewise 
the "dating" granted. Spring shipments in general will 
be made from December on, January, February, and 
March being the heaviest months, and the most frequent 
datings are March 1 and April 1, although February 1 
and May 1 may also be granted. Fall shipments in general 
will be made from May on, July, August, and September 
being the heaviest months, and the most frequent datings 
are September 1 and October 1, although August 1 and 
November 1 may also be granted. Certain houses have 
eliminated the season dating entirely. 

Considerable interest has been manifested in the trade 
acceptance, and some educational work has been under- 
taken by the associations, but little use on the whole is 
made of the instrument. In 1918, of 62 middle western 



330 THE MECHANISM OF COMMERCIAL CREDIT 

houses, 16 were using it with satisfactory results, while 
13 were desirous of employing it, but considerable lack of 
knowledge of its proper use was found, as well as lack of 
interest due to shortness of terms and fear of loss of busi- 
ness through non-universality of its use. 

As noted above, the com m ittees of the national and con- 
stituent associations deal with overdue accounts as well as 
terms and discounts. The practice of charging interest on 
overdue accounts is widespread in certain sections, being 
reported as general in New England. Particular interest 
has been manifested by the Western Association, only 9 
out of 67 reports to it in 1918 showing no interest charged, 
while in 1919 the proportion had fallen to 3 out of 40. 



CHAPTER XVI 

THE LUMBER AND MISCELLANEOUS MANUFACTURING 
INDUSTRIES 

The present chapter deals with a miscellaneous group 
of industries. The articles are of various kinds, and the 
factors governing terms differ accordingly. Two of them, 
that is, lumber and jewelry, especially show the influence 
of general competitive conditions. In both the actual terms 
in use lack uniformity, and payments tend to vary accord- 
ing to the needs of the particular buyer. In lumber there 
is marked variation according to the condition of the 
market, terms being on a satisfactory basis when the selling 
manufacturers and wholesalers control the situation, and 
weakening as a buyers ' market develops. They are, how- 
ever, relatively short, being about 2 per cent 5 days after 
arrival, net 60 or 90 days. On the other hand, the retail 
jeweler is engaged in a distinctly seasonal business and 
needs to be carried until he sells part of his merchandise. 
He, therefore, is granted regular terms of 6 per cent 4 
months or season settlement. 

The other industries considered have on the whole few 
distinguishing features. Paint and varnish and glass terms 
are largely either 1 per cent 10 days, net 30 days or 2 per 
cent 10 days, net 60 days. The quoted drug and paper 
terms, on the other hand, generally do not run beyond 30 
days, being either 1 per cent or 2 per cent 10 days with 
net terms of 30 days, although in a considerable part of 
the paper business they are also 2 or 3 per cent 80 days. 
A conspicuous exception is wall paper, which is strictly 

331 



332 THE MECHANISM OF COMMERCIAL CREDIT 

seasonal and carries a dating together with graded terms. 

Lumber. 1 — An outstanding feature of the lumber indus- 
try for the present purpose is the complexity of its or- 
ganization. It is estimated that there are over 40,000 
manufacturers, ranging all the way from the small portable 
mill, which may operate on either virgin timber or second 
growth, to the large mill operating on extensive bodies of 
virgin timber. Similarly, there are a large number of 
wholesalers and retailers. As a result, wide variations in 
selling and financing methods have always been found, and 
changes occur from time to time as business conditions 
change. There is no conspicuous difference between the 
different kinds of wood, in spite of certain differences in 
demand and the varied problems of production, as all 
manufacturers and wholesalers come into competition with 
each other to a greater or lesser extent. 2 

Prior to 1921, the recommended terms were prepared by 
the individual associations, but in that year the American 
Lumber Congress adopted a resolution, which it reaffirmed 
in 1922, recommending certain terms to the manufac- 
turers', wholesalers' and retailers' associations, as follows: 
"Freight, net cash. Balance of invoice subject to 2 per 
cent discount if paid within 5 days after arrival of car, 
or net if either closed within 5 days after arrival by note 
or trade acceptance due 90 days from date of invoice and 
bill of lading, or if running on open account for 60 days. 
In the last case, subject to sight draft 65 days after date 
of invoice." Competition is so keen to-day, however, that 

1 Acknowledgment is due Mr. W. W. Schupner, Secretary, National 
Wholesale Lumber Dealers' Association, and Mr. Wilson Compton, 
Secretary-Manager, National Lumber Manufacturers' Association, 
for reading this section. 

a One authority believes, however, that, as the value of the average 
carload of hard wood is considerably in excess of that of a carload 
of soft wood, and as many of the consumers of hard woods are in 
business in a small way and with limited capital, in actual practice 
more liberal terms are extended on hard woods, 



LUMBER AND MISCELLANEOUS INDUSTRIES 333 

' ' manufacturers and wholesalers are finding it difficult to 
transact their business on the basis of terms which they 
think should prevail." On the other hand, in 1920 " mills 
did a great deal of business on a cash-with-order basis." 

In discussing in greater detail the terms of the indi- 
vidual associations, it will be well to consider separately 
the manufacturer's situation and the wholesaler's situation. 

Manufacture. — Manufacturers' terms have been substan- 
tially of three general classes. First are those calling for 
part cash with order and the balance on receipt of notice of 
shipment. Such terms are used by the very small operator 
without yards, who puts his product in transit as soon as 
cut. Second are terms embodied in special contracts drawn 
to cover a considerable period of time. This form is 
usually employed between large mills and wholesalers and 
manufacturers of products such as furniture, where these 
manufacturers receive their entire supply of raw material 
from the mills in question. These terms vary according 
to the individual case. 

The terms recommended by certain of the larger manu- 
facturers' associations, which have interested themselves 
in the subject during the past 10 years, provide the third 
class, but deviation from them has been frequent. The 
cash discount specified, in particular by eastern and south- 
ern associations, 3 has been 2 per cent 10 days or 15 days 
from date of invoice on the net amount of the invoice after 
deduction of freight, 4 in some cases if the remittance is 
mailed within that time. 5 While for many years 15 days 

3 One association provided for discount for payment on receipt of 
invoice. Several other associations reported these discounts generally 
in use among their membership. 

4 A delivered price is generally quoted, and deduction of the freight 
by the purchaser permitted. 

6 With a relatively few producers the discount is 1£ per cent, 
and in only one section may it be said to be practiced in a terri- 
torial way, namely Buffalo and Tonawanda, and there it is largely 
confined to sales through New York State. 



334 THE MECHANISM OF COMMERCIAL CREDIT 

was the universal discount period, it is stated that the 
western producers found themselves handicapped by this 
arrangement, due to the fact that cars were in transit from 
15 to 30 days, and as they got farther and farther east 
with their product and railroad congestion increased, de- 
livery took 60 days or more, whereas in the South and East 
rail delivery was usually secured within the 15-day period. 
As a result, the discount period was not as strictly observed 
by the western shippers. The majority of the western 
associations, as well as one northern and one southern asso- 
ciation, 6 have therefore had instead a clause permitting 
the cash discount for payment within 5 days after arrival 
of the car, in general as evidenced by the paid freight bill. 
Toward the close of 1917, three of the western and northern 
associations, in the belief, it is stated, that terms would 
ultimately be entirely on a net basis and that a 2 per 
cent discount was excessive, reduced the discount in their 
recommended terms to 1 per cent. Great difficulty, how- 
ever, was experienced, and the former discount was re- 
stored after about a year. In several cases 1 per cent 30 
days from date of invoice has also been specified, and in the 
case of one southern association, which had terms calling 
for 2 per cent within 5 days after arrival of car, the 1 per 
cent was given for payment within 30 days after arrival 
instead of invoice date. 

Standard net terms have been 60 days from date of 
invoice, although in a few cases where no terms have been 
recommended it is reported that 30 days have been given 
instead. In certain cases provision has been made for a 
trade acceptance, 7 and several associations have specified 
that it be mailed within a certain number of days, such as 



* One -western association stated that 1 per cent 5 days after 
arrival was in general use among its membership. 

T Another association also reported the use of the trade acceptance 
to cover the net period. 



LUMBER AND MISCELLANEOUS INDUSTRIES 335 

10 or 15, after the invoice date. One association permitted 
90 days with a trade acceptance as against 60 days with a 
note settlement. Difficulty arises in case a buyer wishes to 
discount his bill, but has not as yet received the shipment. 
Largely in the West and South, 8 a clause has been included 
to govern terms in the event of non-arrival of the car within 
a certain period, either the discount period, where this is 
a specified number of days after date of the invoice, or 
where this period is 5 days after the arrival of the car, 
within 30 days or the net period of 60 .days. In this event 
it has usually been provided that 90 per cent of the invoice, 
less the estimated freight (the actual figure for which, 
however, is given by many shippers) shall be paid, and the 
balance be due on arrival and inspection. In certain cases, 
principally in the West, a provision, however, has been 
inserted prohibiting the deduction of the discount when 
payment is not made within a specified number of days 
after the date of the invoice, in certain cases 30 days and 
in other cases 60 days. 9 

Wholesale. — A study published in 1918 stated that 
"there has been a marked tendency in recent years to 
increase the sales of lumber from the sawmill direct to 
the larger consumer, or retail yard. ' ' 10 Wholesalers, how- 
ever, state more recently that the high prices since pre- 
vailing and the increased cost of doing business has 
resulted in mills seeking the wholesalers, and increased the 
proportion of business done through them. The practice 
varies with the different localities, 60 per cent of the out- 
put of southern pine, for example, being sold direct, chiefly 

8 Another association also reported use of the clause by its mem- 
bership. 

8 One association specifying 30 days stated that the arrangement 
had been provided "to allow sufficient time for the shipper to render 
invoices and tally sheets and for the consignee to receive, check and 
make remittances and take advantage of the discount.' ' 

10 Dodd, Lumbering (Detroit, 1918), p. 13. 



336 THE MECHANISM OF COMMERCIAL CREDIT 

by large mills, while on the West Coast the figure is but 
20 per cent. Considering the type of purchaser, a leading 
authority has given the following estimates of the propor- 
tions of business done by lumber manufacturers and whole- 
salers with retailers, planing mills, and manufacturing con- 
sumers. In this compilation, the planing mill percentage 
is separated from the general retail business, although it is 
very common for a retail lumber yard to operate a planing 
mill. 



Section 



New England 

Middle Atlantic States. . 
Southern Atlantic States 

Central States 

Western States 





Planing 


Retail 


mill 


Per cent 


Per cent 


50 


20 


45 


25 


35 


30 


60 


10 


40 


30 



Manufac- 
turing 
con- 
sumers 



Per cent 
30 
30 
35 
30 
30 



Two leading middle western wholesalers, however, state 
that the trade of wholesalers with retailers is a relatively 
small part of the business in that section, although it is 
believed that in the East the reverse is the case, and one 
estimates that 60 to 70 per cent of wholesalers' sales in his 
territory are to manufacturing consumers. 

Standard recommended terms were first adopted by the 
National Wholesale Lumber Dealers' Association in 1902. 
These terms provided for net cash payment of freight, the 
balance to be settled for by note at 60 days from date of 
invoice, or less 1 1/2 per cent if paid within 15 days from 
date of invoice or 1 per cent 30 days. No discount was to 
be allowed after 30 days, but in the event of non-receipt of 
car within the discount periods, prepayment was not held to 



LUMBER AND MISCELLANEOUS INDUSTRIES 337 

forfeit the right to make corrections. These terms were 
re-affirmed at subsequent conventions, although there had 
gradually come about widespread deviation from them. In 
1917, the committee on terms of sale unsuccessfully recom- 
mended the recognition of existing conditions and instead 
the adoption of terms calling for a note at 90 days from 
date of invoice, with a discount of 2 per cent if paid within 
10 days from date of arrival of car. It was stated that 
terms at that time were in many cases 2 per cent 30 days, 
net 90 days, from date of shipment, which were first insti- 
tuted in the case of shipments to a distance in view of the 
time the shipment was in transit. 

Several of the retailers' associations have interested 
themselves in terms, and adopted recommended terms on 
which their members purchase. While this has been 
most prominent in the metropolitan district, it is stated 
that such terms have been adopted among others in New 
England, New York State, New Jersey, Ohio, Pennsyl- 
vania, and Illinois. ' ' The main point in contention^ ' ' states 
one authority, "is that the retailer would like to buy at a 
certain time from arrival, whereas the wholesaler endeavors 
to insist (in order to definitely fix the date) on the time 
being based from date of shipment. The reason for this 
contention has been the great delay since the war in lum- 
ber coming through/ ' The recommended terms of the 
New York (City) Lumber Trade Association call for 2 per 
cent 10 days from date of arrival or note due 3 months 
from date of arrival, and a considerable amount of lumber 
has been bought on these terms, while net 4 months from 
arrival has also been employed. 

After a conference with representatives of other lumber 
trade organizations, standard recommended terms were 
prepared by the committee on terms of sale of the whole- 
salers ' organization, and adopted at the 1920 convention. 
These terms called for net cash 60 days from date of in- 



336 THE MECHANISM OF COMMERCIAL CREDIT 

voice, or less 2 per cent if paid within 15 days from date 
of invoice, or 1 per cent if paid within 30 days. Settle- 
ment by note or trade acceptance was permitted at 90 days 
from date of invoice, same to be mailed within 10 days 
after arrival of car. In the event of non-arrival of the car 
within the discount period deduction of the discount was 
permitted for payment within the discount period of 80 
per cent of the net amount of the invoice (estimated freight 
deducted), the balance to be paid within 10 days after 
arrival and unloading, but if not so paid the discount was 
to be credited only on the amount paid within the discount 
period. The provisions as to freight and non-forfeiture of 
the right to make corrections were again inserted, as well 
as the 30-day discount limit. Among variations from these 
terms, it should be noted that eastern lumber, manufac- 
tured in New England and the Canadian Provinces, for 
many years has been generally sold on special terms of 1 
per cent 10 days from date of invoice, or net 30 days. 

In the industry, while net terms in certain cases are on 
open account, they are more frequently covered by a note. 
Within the last few years, the committee on terms of sale 
of the National Wholesale Lumber Dealers' Association has 
advocated the use of the trade acceptance, and its standard 
terms were changed, in 1919, by providing for the use of 
either trade acceptance or note where net terms were em- 
ployed. The committee stated, in its 1920 report, that 
according to the information which it had, the use of 
the instrument was growing rapidly. It was stated, 
however, that certain retailers in the larger cities who do 
not discount endeavor to force the use of the open account, 
and frequently run beyond the 90-day net period. 

Office Furniture and Store Fixtures. — Office furniture is 
largely sold by the manufacturer direct to the retailer. 11 

11 Acknowledgment is due Mr. J. Arthur Witworth, Manager, Asso- 
ciated Office Furniture Manufacturers, for reading this material. 



LUMBER AND MISCELLANEOUS INDUSTRIES 339 

Manufacturers of certain lines — particularly filing equip- 
ment — however, have chains of stores through which their 
product is retailed. Store fixtures are largely sold through 
agents, but are sold direct by some manufacturers. 

The cash discount granted on office furniture usually 
ranges from 2 to 5 per cent for payment within 10 or 20 
days, while carload lots carry a discount of from 3 to 5 per 
cent. A tightening up of terms and decrease in the maxi- 
mum cash discount period is reported within the past 5 
to 10 years. The percentage of accounts taking the cash 
discount appears higher than for home furniture, several 
firms reporting as high as 95 per cent. 

Very few firms engaged in the manufacture of store fix- 
tures at the present time give any cash discount on their 
product, and only a few firms building special lines of 
fixtures still give a cash discount of from 2 to 5 per cent. 12 
The standard terms in the industry are net 30 days, and a 
very large proportion of the business is done on these 
standard terms. A small proportion of the business is done 
on the deferred-payment plan. In this case an advance 
payment of usually from 20 to 30 per cent is required, 
with a total payment of from 40 to 50 per cent before the 
goods are actually delivered. The total time given seldom, 
if ever, exceeds 12 months. A large proportion of the 
deferred-payment business does not carry over 8 months' 
time, and many firms give no more than 6 months. 

The amount of deferred-payment business has been 
gradually decreasing for several years, sales made on the 
standard terms having increased correspondingly. Prior 
to 1913, a large proportion of the business was done on 
the deferred-payment plan, 2 or 3 years' time often being 
given, and cash discounts were also very common. The 

13 Acknowledgment is due Mr. F. C. Luces, Secretary, National 
Commercial Fixture Manufacturers' Association, for reading this 
material. 



340 THE MECHANISM OF COMMERCIAL CREDIT 

practice of giving this long time, however, it is reported, 
has now been almost entirely discontinued, and the business 
is stated to be on by far the best basis as to terms that it 
ever has been. 

Paint and Varnish. 13 — Both paints and varnishes in 
many cases are produced by the same manufacturers, while 
both are distributed largely through the same jobbers, and 
a close relation exists between their use. Varnish terms 
tend to conform to those on paint. Of the total output of 
paint, it is estimated that 60 per cent is sold by manufac- 
turers direct to industrial consumers, such as manufactur- 
ing plants and railways, while 40 per cent is sold to whole- 
sale and retail dealers and to painters direct. On the 
whole, there are very few exclusive paint jobbers, and glass 
or hardware is handled, many of these dealers being either 
hardware jobbers or wholesale druggists. 

Terms generally prevailing with paint manufacturers 
for many years have been 2 per cent 10 days, net 60 days. 
At the close of 1918, a resolution was adopted by the 
national association favoring a change in the terms to 
dealers to 1 per cent 10 days, net 30 days, to be effective 
April 1, 1919. An effort was made by some of the larger 
houses to put these terms in force, but the attempt was 
abandoned, as the general consensus of opinion proved to 
be decidedly against the reduction. While hardware job- 
bers were decidedly against such a change, which would 
bring the paint terms "out of line" with those on which 
they purchased the remainder of their merchandise, the 
terms have been favored for several years by the wholesale 
druggists, whose standard purchasing and selling terms 
they are. In accordance with a recommendation made 
about a year previously, terms to manufacturers and other 

13 Acknowledgment is due Mr. G. B. Heckel, Secretary-Treasurer, 
Paint Manufacturers' Association of the United States, for reading 
this section. 



LUMBER AND MISCELLANEOUS INDUSTRIES 341 

industrial consumers are generally 1 per cent 10 days, net 
30 days, in particular by the larger houses. Railroads, 
however, receive net cash terms, at least from the larger 
manufacturers. 

The varnish industry in the past has been noted for long 
terms and for the looseness with which even the prevailing 
terms were enforced. During the last 10 years, manu- 
facturers' terms were generally reduced to 5 per cent 30 
days, net 4 months. Within the last 6 or 7 years these 
terms have been further reduced to 2 per cent 10 days, net 
60 days. These were the prevailing paint terms, and many 
paint manufacturers were adding varnish plants, while 
conversely many varnish manufacturers were commencing 
to manufacture paint. It is estimated that at present 75 
or 80 per cent of the varnish sold to dealers carries these 
terms, while to manufacturing plants, railways, etc., 
the terms are shorter still. A general tendency to sell on 
net terms is reported, as well as to shorten terms and make 
terms and discounts more uniform. A considerable amount 
of varnish, however, is still sold on the old 4 months' terms, 
in particular, it is believed, to the carriage trade. 

Both the paint and varnish manufacturers' associations 
approved the use of trade acceptances as far as possible, to 
be effective January 1, 1919, but the instrument thus far 
has been used only to a very limited extent. 

Jobbers' terms, which have been in effect for many years, 
are 2 per cent 10 days, net 60 days, for varnish and mixed 
paints. White lead and linseed oil bear terms of 1 per cent 
10 days, net 30 days, changed in the case of white lead 
since 1917, from 2 per cent 10 days, net 60 days, and tur- 
pentine bears net 30 days. Dry paints are generally sold 
on terms of 1 per cent 10 days, net 30 days. 

Glass and Glassware. 14 — Manufacturers of glass products 

14 Acknowledgment is due Mr. J. R. Johnston, Jr., Vice-President, 
Johnston Brokerage Co., Pittsburgh; Mr. John Kunzler, Actuary, 



342 THE MECHANISM OF COMMERCIAL CREDIT 

sell largely to jobbers, who usually have an exclusive terri- 
tory, and to consuming manufacturers in other industries 
who use glass products. In the case of bottles and jars, a 
large quantity is sold to manufacturers of various food 
products, and it is estimated that from 75 to 90 per cent 
of the output is sold to industrial consumers, the balance 
distributing itself between wholesalers and retailers. Plain 
prescription ware alone is sold to jobbers. Jobbers of plate 
and window glass sell to contractors and manufacturers of 
building-construction material as well as to retailers. Only 
a small amount of glassware is sold direct to the retailer, 
the nature of the product limiting such sales to cut glass, 
tableware, some light goods, and a few specialties. In- 
creased capacity on the part of some manufacturers of 
glassware has reduced the operating period in certain lines 
to 6 and 7 months. It is stated that there has been a tend- 
ency to shift the responsibility for stocking the product 
to the manufacturer. 15 

Regular terms of glass manufacturers are largely 1 per 
cent 10 days, net 30 days. This has been the case with 
plate glass for 20 years or more, window glass since De- 
cember 5, 1916, bottles for 15 years, and with ornamental 
glass ware. The same terms apply to flint and lime glass 
(pressed and blown ware) since January, 1916, and for 
blanks for cut glass, except that the discount period is 15 
days. Cut glass since December, 1918, however, carries 
terms of 1 per cent 30 days, net 60 days. Former terms 
on flint and lime glass, ornamental glassware and cut glass 

American Association of Flint and Lime Glass Manufacturers, Inc.; 
Mr. Charles H. Ferris, Assistant Business Manager, National Bottle 
Manufacturers' Association of the United States and Canada; Mr. 
T. P. Strittmayer, Quaker City Cut Glass Co., Philadelphia; and 
Mr. North Storms, Secretary, National Glass Distributors' Associa- 
tion, for reading parts of this section. 

"Certain of the data in this paragraph have been taken from 
United States Bureau of Foreign and Domestic Commerce, Miscel- 
laneous Series No. 60, 



LUMBER AND MISCELLANEOUS INDUSTRIES 343 

were 2 per cent 30 days, net 60 days, and on window glass 
2 per cent 10 days, net 60 days. 

The bulk of sales of plate and window glass and orna- 
mental glassware are made to jobbers, who discount their 
bills. Various estimates put the proportion of discounted 
bills of manufacturers of flint and lime glass at one- 
third to two-thirds (in amount, not number) and the 
balance take from 30 to 45 or 60 days. 'Normally, ap- 
proximately 75 per cent of invoices of bottle manufac- 
turers are discounted, and 60 per cent of those of cut glass 
manufacturers. 

The trade acceptance is not employed in the majority of 
the branches of the industry, in particular for plate and 
window and cut glass. Its use in connection with orna- 
mental glassware is very limited, as is also the case with 
bottle manufacturers. Certain of the latter grant 60 days 
or 90 days in place of 30 days where the acceptance is 
employed. A leading manufacturer oppressed and blown 
glassware estimates that 4 per cent of his accounts (in 
amount, not number) have been covered by trade accept- 
ances. 

Jobbers or distributors of plate and window glass also 
sell on terms of 1 per cent 10 days from date of shipment, 
net 30 days. These terms have been applied to plate glass 
for many years, and were applied about 4 years ago to 
window glass, following the similar change in manufac- 
turers' terms from 2 per cent 10 days, net 60 days. It is 
stated that occasionally contractors are permitted to pay 
85 to 90 per cent of the contract price by the 10th of the 
month for the preceding month's deliveries. Trade accept- 
ances are not generally used by distributors except *in 
settlement for carload shipments. 

Jewelry. 16 — Twenty-five or more years ago, regular terms 

^Acknowledgment is due Mr. Sidney Y. Ball, President, Norris 
Alister-Ball Co., Chicago, for reading this section. 



344 THE MECHANISM OF COMMERCIAL CREDIT 

of jewelry manufacturers were 6 per cent 10 days, 5 per 
cent 30 days, net 4 months. Subsequently, however, com- 
petition became very keen. As competition grew, orders 
were solicited earlier and earlier each year, until business 
for the fall season, which usually runs from July until 
January, was solicited as early as April. This tendency 
was accentuated by the fact that business during the first 
half of the year is normally duller. As an inducement to 
wholesalers to place orders early and thus to put the fac- 
tories at work on them, a season dating of January 1 was 
introduced, and shipments made during May, June, and 
early July. This was followed by the institution of a July 
1 settlement date on goods for the spring season, which is 
stated by one authority to have occurred as a result of the 
dull times in the industry following 1906. In the mean- 
time, the season terms had been applied also by wholesalers 
to retailers. Aside from the fact that manufacturers had 
made a like change in their terms to wholesalers, the forces 
bringing about this change were similar to those existing 
in the other case. Competition became keener, and efforts 
were made to induce earlier purchasing and thus avoid 
extreme congestion at the end of the fall season, as it is 
impossible for the travelers upon whom the retailers de- 
pend to visit each of them at the exact moment when he 
wants to buy his goods. In addition, there is the fact that 
the large Christmas business places the retailer in funds. 
In consequence, the former regular terms of 6 per cent 10 
days, 5 per cent 30 days, net 4 months, came to be in little 
use, and have been characterized as "an old formality 
which has been in discard for years/' terms being either 
season settlement or 6 per cent 4 months. It is stated that 
while "the season settlement proposition has been in prac- 
tice for many years," it has "possibly been abused only 
within the past 10 to 12 years, during which time it was 
pretty generally extended to all whose credit was worth 



LUMBER AND MISCELLANEOUS INDUSTRIES 345 

while.' ' In New England, however, wholesalers never 
adopted it very extensively, due, it has been suggested, to 
the fact that they cover a smaller territory and enjoy better 
transportation facilities. 

During the war, however, the situation with respect to 
terms changed. The market began to assume more the 
appearance of a sellers' market, and manufacturers short- 
ened terms and reduced discounts, in many cases to 2 per 
cent or 3 per cent 30 days, net 4 months. In consequence, 
in certain cases there was a similar change in wholesalers' 
terms. In fact, wholesalers at various times, for example, 
in 1910, have discussed the question, but no unified action 
has been taken, the weaker wholesalers having raised strong 
objection. Existing terms thus present a rather confused 
appearance, many still continuing the older season settle- 
ment terms, while others have reduced discounts and 
shortened terms as indicated above. With the scarcity of 
merchandise, certain wholesalers and retailers are reported 
to have tended to pay more promptly in the hope of obtain- 
ing preference in short-time deliveries and on short or de- 
sirable merchandise. A leading wholesaler, speaking of the 
retailer, makes the following statement: "Credit means 
a great deal in the jewelry business, as the biggest per- 
centage of the medium-sized jewelers throughout the 
country have emanated from the workbench, and have built 
up their business on the credit that they have received. Of 
course, some of these individuals have taken advantage of 
this credit and misused same, but the larger percentage 
have built up their stock and gradually are getting in a 
sounder financial condition, and it will be but a short time 
when they voluntarily will liquidate tlieir debts in shorter 
time than in the past. ' ' 

Data obtained by the committee on terms and discounts 
of the National Wholesale Jewelers' Association showed 
that average outstandings of wholesalers on May 1, 1920, 



346 THE MECHANISM OF COMMERCIAL CREDIT 

were equal to 83 days' sales. 17 Of the total volume of sales, 
approximately 38 per cent were made on 30 days' time, 11 
per cent on 60 days, 11 1/2 per cent on 90 days, 23 per cent 
on 4 months, 11 1/2 per cent on semi-annual terms, and 5 
per cent on " running account," the average of which, 75 
days, approximately agrees with the figure given above. 

While the above are the general terms which prevail on 
jewelry certain items are sold on different terms, both by 
manufacturers and by jobbers. The principal classification 
is into standard and non-standard merchandise, the latter 
of which " needs to be stocked, arranged, examined, and 
discussed as to price and quality. ' ' 18 Terms on American 
watches are shorter, such as 30 or 60 days, and discounts 
in many cases smaller, although it is stated that manu- 
facturers generally price their watches on a 6 per cent 
basis, and wholesalers do likewise. Due to the relatively 
small number of manufacturers of trade-marked watches, 
it is possible to take advantage more easily of the existence 
of a sellers' market. Terms on the item vary somewhat, 
6 per cent 10 days or 30 days, net 4 months, being fre- 
quently given but without further dating. Sterling silver- 
ware largely carries terms of 2 per cent 10 days, net 30 
days. Diamonds, the other important non-standard item 
in addition to jewelry, have been sold on longer time. This 
is also partly due to the larger amounts involved, in par- 
ticular where sold in lots and not as single diamonds, and 
by this means the retailer is enabled to carry a larger stock 
for show purposes. Moreover, diamond importers have 
granted very long terms, corresponding to the terms given 
by European sellers. Cutters' and jobbers' terms have 
frequently been 8 to 12 months. As a result of scarcity 

"The figures given in the committee's report represent unweighted 
averages. 

u Beport of Committee on Terms and Discounts, National Whole- 
sale Jewelers' Association, Mr. Sidney Y. Ball, chairman, presented 
at the June, 1920, convention. 



LUMBEE AM) MISCELLANEOUS INDUSTRIES 347 

several years ago, however, both importer and cutter came 
nearer a cash basis, although the retailer is still used to 
long time, but is neither demanding nor receiving the 
old extremely long terms. Fo.ur to 6 months' terms are 
reported, and in some cases cash discounts, such as 3 per 
cent 10 days, are quoted with these terms. 

The situation is concretely shown in the following table, 
based on data obtained by the committee, both as to the 
actual time received by wholesalers on their purchases and 
granted by them on their sales: 



Received 



Granted 



Diamonds 
Watches 
Jewelry . 



Clocks 

Silverware . . 
Miscellaneous 



7 months 

1 month 

1 month to season 

settlement (very 

mixed). 

10-30 days 

1 month 

...do 



4.9 months 
2.3 months 
3.5 months 



2.5 months 

2.6 months 
2.1 months 



With respect to the .cash discount, about one half stated 
that they were " good-natured, J ' and granted 30 to 90 days 
extra, with full discount, while the other half were strict. 

Wholesalers favored somewhat shorter terms to retailers 
than those employed, namely, about 4 months on the aver- 
age on diamonds, 2 months on watches, 2.8 months on 
jewelry, 1.9 months on clocks and silverware, and 2.1 
months on miscellaneous items. Preference was expressed 
for a 6 per cent discount, both on purchases and sales, and 
it is also favored by retailers. It was stated that these 
terms would be practicable, in- view of the fact that data 
obtained from retailers by the committee showed that 67 
per cent of the latter 's sales are for cash, 15 per cent on 



348 THE MECHANISM OF COMMERCIAL CREDIT 

30-90 days' time, 8 per cent on 4 months' time, and 10 per 
cent on running account. Two-thirds of the retailers ex- 
pressed themselves as being able to purchase on shorter 
terms. Data obtained by the committee as to terms on 
which retailers then purchased showed 64 per cent of pur- 
chases made on 30 days' time, 6 per cent on 60 days, 7 per 
cent on 90 days, 4 per cent on 4 months, H-2 per cent on 
semi-annual terms, and 7 per cent on running account. 
The average of these is 52 days, as contrasted with 75 days 
shown by wholesalers as their average terms to retailers, 
and the correct figure was stated to be probably between 
the two. Average time received on diamonds was shown 
as 4 months, on watches 45 days, on jewelry 56 days, on 
clocks 40 days, on silverware 43 days, and on miscellaneous 
items 32 days. 

The trade acceptance is employed by some leading whole- 
salers in the industry. Only one-third the retailers cov- 
ered in the survey, however, had used them, and of these 
one-third did not like them. 

Optical Merchandise. 19 — In the optical trade e. o. m. 
terms prevail. on nearly all accounts, both between manu- 
facturer and wholesaler and wholesaler and retailer, and 
the 10th is the date specified. 

The cash discount of the manufacturer to the wholesaler 
is 2 per cent on ;the 10th of the month following date of 
invoice, at which time the bill is due. The prevailing 
wholesaler 's terms are 6 per cent cash discount on the 10th 
of the month following date of bill, after which time it 
becomes net, with some houses immediately due and with 
others due on the 10th of the month following. The matter 
of net terms in this connection is not very clearly estab- 
lished nor lived up to. A leading authority estimated, in 

13 Acknowledgment is due Mr. Guy A. Henry, SecTetary-Manager, 
American Association of Wholesale Opticians, for reading this 
section. 



LUMBER AND MISCELLANEOUS INDUSTRIES 349 

1919, that roughly two-thirds of accounts of retailers with 
wholesalers were discounted. 

The cash discount of 6 per cent is "a relic .of the days 
when the optical business was closely allied with the 
jewelry trade/' although the two lines are now quite dis- 
tinct and separate and only in rare instances affiliated. It is 
the opinion of most wholesalers that the 6 per cent discount 
for cash is an unreasonable premium for prompt payment, 
and while a few have expressed the opinion that a high 
cash discount stimulates prompt payment, the consensus of 
opinion is that a decrease in the discount should not seri- 
ously affect the proportion of accounts which are dis- 
counted. Many wholesalers desire to reduce the discount 
to 2 per cent, making it the same as they receive .from the 
manufacturers, but a few have opposed the change, and 
this has deterred the majority. 

A number of wholesalers have been endeavoring to in- 
troduce the 2 per cent cash discount by applying this on 
some of their specialties, and practically all machinery and 
instruments are now on a 2 per cent cash discount or ' ' net ' ' 
basis, while 6 per cent is still allowed on ophthalmic lenses, 
frames, mountings, prescription work, etc. On the Pacific 
Coast the discount generally allowed and in effect for some 
time is but 2 per cent on all items. 

Wood Pulp and Paper. 20 — Terms in the industry vary 
according to the type of paper, but in general are on a 
30-day basis. It has been stated that "when conditions 
have been in favor of the mills, discounts from 2 to 3 per 

29 Acknowledgment is due Mr. Wm. C. Ridgway, Secretary, The 
National Paper Trade Association, for reading this section, and to 
Mr. Freas Brown Snyder, President, W. C. Hamilton and Sons, Miq- 
uon, Pa.; Mr. O. B. Towne, Secretary-Treasurer, Waxed Paper 
Manufacturers' Association; Mr. E. S. Wagner, Treasurer, Scott 
Paper Co., Chester, Pa.; Mr. Wm. W. Baird, Secretary, National 
Paper Box Manufacturers' Association; and Mr. Henry Burn, 
President, Wall-Paper Manufacturers' Association, for reading parts 
thereof. 



350 THE MECHANISM OF COMMERCIAL CREDIT 

cent have been in effect, and when the market has been a 
jobbers' market the jobbers have in a great many instances 
succeeded in eliminating discounts." Another authority 
states that "broadly speaking, cash discounts are more 
liberal in the fine-paper line. ' ' 

Manufacturers of wood pulp, in general, sell on terms 
of net 30 days, but a few allow a cash discount, such as 1 
per cent on receipt of invoice, or permit anticipation at the 
rate of 6 per cent per annum. 

Paper Manufactures. — Newsprint paper is sold by 
manufacturers on terms of net 30 days, or settlement is 
permitted by a specified date, such as the 15th, for all ship- 
ments made during the preceding month. A greater pro- 
portion of newsprint and specialties is sold by manufac- 
turers direct to consumers than in the case of other 
products. 

Practically all manufacturers of writing paper sell their 
product on terms of 3 per cent 30 days from date of in- 
voice, while a few manufacturers allow net terms of 4 
months on note, with the option of 3 per cent 30 days. A 
leading wholesaler also reports purchasing this class of 
paper on terms of 2 per .cent 30 days. Little use of the 
trade acceptance is reported. Manufacturers of writing 
paper sell practically their entire output to wholesalers 
and converters, who make up the manufactured finished 
product into blank books, tablets, envelopes, etc. 

The same terms (3 per cent 30 days) are also employed 
by manufacturers of cover paper and similar paper of the 
higher grades. Practically the entire product is sold to 
paper merchants or converters. Some manufacturers of 
fine or printing paper sell on terms of 2 per cent 10 days, 
and many on terms of net 30 days. 

Manufacturers usually sell book paper to distributors on 
terms of 3 per cent 30 days. Bills are due net in 31 days. 
During recent years certain mills eliminated the cash dis- 



LUMBER AND MISCELLANEOUS INDUSTRIES 351 

count and went on a net basis, but the reverse tendency is 
now apparent. Mills selling the converter (such as the 
manufacturer of envelopes) or the lithographer, tend to 
quote a 2 per cent discount, but this is not universal. 
Terms of paper merchants to printers and other consumers 
are usually 2 per cent 30 days, and they desire to have 
manufacturers observe the same terms when selling direct. 
A few accounts are stated to receive additional time on a 
net basis and to settle by note or open account. A large 
percentage of the tonnage is sold on contract to pub- 
lishers. 

Wrapping paper is sold by manufacturers on terms of 
2 per cent and 3 per cent 30 days, although in some cases 
such coarse papers carry only 2 per cent 10 days. 

About 60 per cent of the output of waxed paper is sold 
to the baking industry, and the demand in the southern 
and Rocky Mountain sections is relatively light compared 
with the remainder of the country. Prior to May, 1920, 
adopted terms of the manufacturers' association were 2 
per cent 10" days, accounts west of Denver receiving 2 per 
cent 20 days, but at that time the terms were abolished. 
Some manufacturers now sell on terms of 2 per cent 10 
days, net 30 days, others on net 30 days. During the past 
decade the period was reduced successively from 30 days 
to 15 days and to 10 days, with an allowance of 10 days 
extra to extreme western territories, the discount remain- 
ing the same. Glassine and grease-proof papers as a rule 
are sold on terms of 2 per cent 10 days. Vegetable parch- 
ment is sold on terms of net 30 days. A considerable pro- 
portion of all other kinds of paper is sold to industrial 
consumers. 

Manufacturers of towels and toilet paper in general sell 
on terms of 2 per cent 10 days, net 30 days. Some manu- 
facturers, however, grant the cash discount for payment 
within 15 days, some within 30 days, while others quote 3 



352 THE MECHANISM OF COMMERCIAL CREDIT 

per cent 30 days and others give net terms of 60 days, with 
a cash discount of 2 per cent 10 days. In certain cases 
longer terms, such as 30 days additional, are granted to 
customers in distant sparsely settled territory, to which 
carload-lot shipments are necessary in order to obtain a 
low freight rate, and a slower turnover thus results. It is 
stated that practically all this type of paper is sold to paper 
merchants or converters. One authority estimates that 60 
per cent of the product is sold to wholesale paper dealers, 
25 per cent to wholesale grocers, and 15 per cent to whole- 
sale druggists and miscellaneous wholesalers. Trade ac- 
ceptances, while by no means general, are used by certain 
leading houses, interest in the majority of cases being 
added for the additional time beyond the regular net 
period. 

Wholesale Paper. — Such houses, in general, follow manu- 
facturers ' terms on the several classes of paper. It is stated, 
however, that coarse or wrapping papers are sold almost 
universally by paper merchants on terms of 2 per cent 
10 days, net 30 days, 10 days e. o. m. terms being granted 
on running accounts. Among fine or printing papers, 
newsprint is sold quite generally on net 30 days. Some 
book papers are also sold on these terms, but these kinds 
of paper, in general, carry terms of 2 per cent 30 days. 
In New England, New York City, Baltimore, and the South, 
3 per cent 30 days, however, formerly prevailed, and in 
the South net terms were 60 days. In consequence of a 
similar tendency on the part of manufacturers, there has 
been a decided tendency on the part of paper merchants 
to shorten terms during the past decade and to reduce the 
discounts. In case of fine papers, up to the opening of 
1919 the discount was almost universally 3 per cent, while 
6 to 7 years ago net terms were 90 days, which has been 
gradually shortened until to-day most goods carry net 
terms of 30 days and but few longer than 60 days. Trade 



LUMBER AND MISCELLANEOUS INDUSTRIES,. 353 

acceptances are not very largely employed by paper mer- 
chants. 

Paper Board, Paper Boxes, etc, — In the spring of 1920, 
manufacturers of box board and paper board successfully 
changed their terms to 1 per cent 10 days, net 30 days. 
Prior to that time terms were generally 2 per cent 15 days, 
net 30 days. In the West, practically the total output is 
sold direct to the converter or consumer. The converter 
manufactures the raw material, paper board, into various 
types of paper boxes, and furnishes these to the user, who 
packs merchandise in them. The jobber or middle-man 
has practically no place in the business west of the Alle- 
ghenies. In the East, however, with about the same ton-* 
nage and value, it has been estimated that he sells probably 
20 per cent of the total, the balance being sold direct by 
the mills to the consumer or converter. Manufacturers sell 
binder's board on terms of 2 per cent 15 days, net 30 days. 
Cardboard also bears a 2 per cent cash discount. 

Terms recommended, in 1919, by the National Paper Box 
Association were 2 per cent 10 days, net 30 days, with inter- 
est at the rate of 6 per cent per annum on overdue accounts. 
Present terms are net 30 days, with no cash discount. 
Extremely limited use is made of the trade acceptance. 
Practically the entire output of paper-box plants is sold to 
industrial consumers. Adopted terms of the Folding Box 
Manufacturers ' National Association are 1 per cent 10 
days, net 30 days. Prior to 1917, practice with respect 
to terms was extremely loose. Manufacturers, it is stated, 
would often make practically a year's supply of goods, 
warehousing them without adequate charge, and would 
ship as required by the customer on terms of 2 per cent 10 
days, net 30 days. Not over 5 to 10 per cent of the output 
is sold to dealers for resale, such items being suit and 
laundry boxes, ice-cream pails, egg containers, etc. During 
1920 terms on corrugated and solid fiber boxes were 



364 THE MECHANISM OF COMMERCIAL CREDIT 

changed to net 10 days, and collections are generally made 
within 15 days. Prior to 6 or 7 years ago terms were gen- 
erally 2 per cent 10 days, net 30 days, and at that time 
the discount was changed to 1 per cent. The trade accept- 
ance is not used to any great extent. Practically the entire 
output is sold direct to industrial consumers. 

Wall Paper. — The manufacturers' association in this in- 
dustry adopted the following terms of sale on July 17, 
1920: "Three months from date of invoice, provided 
settlement is made "by trade acceptance within 10 days from 
the first of the month next following date of shipment. 
For cash payment within the time specified in lieu of trade 
acceptance, 1 per cent discount per month will be allowed 
from the date of such payment to the date trade accept- 
ance would have matured. All invoices become due on the 
10th of the month next following date of shipment if not 
settled previously by trade acceptance or cash. Interest 
will be charged on all overdue accounts. Delays in trans- 
portation do not alter these terms of sale. With the fore- 
going understanding as to settlement, invoices rendered 
between September 15 and February 1 will carry the latter 
date, except in the case of invoices covering goods shipped 
on duplicate orders for fall and winter requirements of 
goods of previous year's manufacture, which class of ship- 
ments carry no advance dating." In other words, by the 
10th of the month following that in which shipment was 
made, the purchaser must decide to settle either by cash 
or by trade acceptance. If he settles by trade acceptance, 
he is allowed 90 days from date of invoice. If the ship- 
ment was made between September 15 and February 1 the 
latter is taken as the invoice date, the net due date being 
May 1. For cash payment discount is allowed at the rate 
of 1 per cent per month. This makes the figure, in the case 
of shipments made between February 1 and September 15, 
which carry no dating, either 3 per cent for payment when 



LUMBER AND MISCELLANEOUS INDUSTRIES 355 

shipped, or 2 per cent 10 days e. o. m. In the case of ship- 
ments carrying the dating, the discount will naturally be 
much greater if payment be made shortly after time of 
shipment. Thus the schedule of one manufacturer quotes 
7 1/2 per cent for payment before September 25, with a 
decline of 1/2 per cent every 15 days until 3 per cent is 
given for payments between January 25 and February 10, 
and the bill is due net if paid between April 25 and May 10. 

Since April 12, 1919, the same terms were in effect, with 
the exception that 30 days was provided in place of the 
10 days e. o. m., and note settlement in lieu of trade accept- 
ance was permitted. Prior to that time the dating was 
March 1 instead of February 1, while prior to about 3 years 
ago the terms were 4 months instead of 3. The object of 
the February 1 dating is to induce dealers to accept, goods 
as manufactured, and before they are actually required. 
Manufacturers can thus deliver as goods are ready, obvi- 
ating the necessity of extensive warehouse space. Manu- 
facture is commenced about September 1, and the manu- 
facturer has but one season, while the retailer has two — 
spring and fall. 

The above are the terms on regular goods. Plain goods 
are not subject to the February 1 dating, while 30-inch 
goods, plain, are sold on a 30-day basis, as are also stock 
goods (carried over from the year previous and not manu- 
factured again). 

Drugs and Medicines. 21 — Manufacture and Import. — 
The drug business as a whole may be generally divided 
into four classes: (1) Drugs and chemicals; (2) proprietary 
articles; (3) druggists' sundries, and (4) druggists' and 
hospital supplies and utensils. The first class may be sub- 
divided into the following groups: (1) Pharmaceutical, 

21 Acknowledgment is due Mr. W. J. Woodruff, Secretary, Ameri- 
can Drug Manufacturers Association, and Mr. C. H. Waterbury, Sec- 
retary, National Wholesale Druggists Association, Inc., for reading 
this section. 



356 THE MECHANISM OF COMMERCIAL CREDIT 

including pills, tablets, fluid extracts, etc. ; (2) biological, 
including vaccines, bacterins, anti-toxines, etc.; (3) medic- 
inal and technical chemicals; and (4) crude drugs and 
essential oils. Perfumes, rubber goods, soaps, soda foun- 
tain supplies, cosmetics, etc., are included in the general 
classification of sundries. Surgical dressings, plasters, 
bottles, scales, etc., properly belong to the classification 
of druggists' and hospital supplies and utensils. Proprie- 
tary articles include, generally speaking, all so-called 
patent medicines advertised and sold under trade-marks. 
The method of distributing the greater proportion of all 
these classes of goods is from the first hands, either manu- 
facturer or importer, to the wholesale druggist, who in turn 
sells them to the retail druggist. 

Crude drugs and essential oils are assembled in the main 
by houses which import them as well as distribute domestic 
goods of this character. Terms on crude drugs, medicinal 
and technical chemicals and essential oils are almost with- 
out exception 1 per cent 10 days, net 30 days. 

The same terms apply generally in the surgical dressing 
field, although the maturity date is frequently extended 
to 60 days on shipments to the far southwest and to the 
Pacific Coast and Rocky Mountain territory. 

The pharmaceutical branch, including pharmaceutical 
specialties (semi-proprietary and non-competitive in char- 
acter), aggregates not more than from 15 to 20 per cent 
of the total volume of the drug business to-day. The larger 
proportion, probably 85 per cent, of pharmaceutical spe- 
cialties, is sold to the retail druggist through the wholesaler, 
while about 25 per cent of the general pharmaceutical line 
goes through the wholesaler, the balance going direct from 
the manufacturer to the retailer. The following are the 
results of a survey of terms made in 1917 : 



LUMBER AND MISCELLANEOUS INDUSTRIES 357 





Net terms to 






Whole- 


Re- 


Discounts 




saler 


tailer 




30 days . . . 


17 


12 


1 per cent 10 days (by all 30-day 
houses except two, which gave 2 
per cent 10 days). 


60 days . . . 


4 


7 


2 per cent 10 days (by all 60-day 
houses). 


10 days . . . 


1 






4 months. . 


1 


•• 





Private formula business (the manufacture of special- 
ties under formulas owned by others) carried instead 1 
per cent 10 days, net 30 days, except for 2 houses giving 
net terms of 60 days. As a small number of the larger 
houses, however, extend terms of 2 per cent 10 days, net 
60 days, some of the firms having 30-day terms occasionally 
extend 60 days when insisted upon. It is estimated, how- 
ever, that 90 per cent of the number of wholesalers discount 
their bills, and in the case of retailers from 40 to 50 per 
cent. One authority states that the percentage of retailers 
discounting varies with the season of the year, the per- 
centage for his house during the first 6 months averaging 
a little over 40 per cent, falling to almost 25 per cent during 
the summer months, and then increasing during the latter 
part of the year to almost 50 per cent. Due to the fre- 
quency and small size of purchases, the trade acceptance 
is not employed by the majority of manufacturers. 

Sales of proprietary medicines are made by manufac- 
turers to wholesalers and to retailers, the individual 
manufacturer usually confining his entire business to one 
of the two methods. Sales to wholesalers in general carry 
a cash discount of 2 per cent 10 days, although a limited 
number grant 1 per cent, some 3 per cent, and quite a 



358 THE MECHANISM OF COMMEBCIAL CREDIT 

number 5 per cent. Sales to retailers carry the same net 
terms as those to wholesalers, maturity usually being in 
30, 60 and 90 days, with a discount for cash varying from 

1 to 5 per cent if invoice is paid within 10, 20, or 30 days. 
In the case of seasonal preparations, longer time to the 
retailer is required in off seasons, and up to 4, 6, and 9 
months may be given at times. The general average for 
the industry has been estimated at 45 days. 

Sales of druggists' sundries are made by manufacturers 
to both wholesalers and retailers. Terms for some years 
have been largely 2 per cent 10 days, net 30 days, from 
date of invoice, but Pacific Coast customers may be given 

2 per cent 30 days, net 60 days. Several leading manufac- 
turers report that from 50 to 70 per cent of their customers 
discount their bills. It is stated that the trade acceptance 
is not employed in the industry. 

Wholesale Drugs. — Since January 1, 1905, recommended 
terms of the National Wholesale Druggists Association, to 
apply to mixed invoices, have been 1 per cent 10 days, net 
30 days. These terms prevail practically over the entire 
country, with the exception of the entire State of Texas 
and a narrow belt running east from Texas to the Atlantic 
Coast and including parts of Arkansas, Tennessee, Ala- 
bama, and Georgia, where, with a few exceptions, the cash 
discount is 2 per cent, although net terms are 30 days. It 
is stated, however, that in these territories the discount is 
gradually being changed to a universal 1 per cent. An 
increasing tendency toward proximo terms was reported 
some years ago and found in particular in the East and 
Southwest. In 1915 data obtained from 135 houses of 
dates for the discounting of city bills showed 88 houses 
which specified the 10th, 26 the 15th, 6 the 5th, and 1 the 
20th, while 2 required settlement any time during the fol- 
lowing month, 10 twice a month and 2 four times a month. 

In a few lines, when sales are large enough to be billed 



LUMBER AND MISCELLANEOUS INDUSTRIES 359 

separately, 2 per cent 10 days, net 30 days, is allowed. On 
druggists' sundries the cash discount now ranges from 
1 per cent to 2 per cent. There has been a movement in 
various sections to include the item in the general terms 
of 1 per cent 10 days, net 30 days, which is meeting with 
some success. New England and the Middle States in 1914 
already showed quite uniformly 1 per cent 10 days, net 
30 days, while on the Pacific Coast all houses have for the 
last five or six years employed these terms. 

The decrease in the average number of days' business 
outstanding shown below reflects the movement for the 
abolition of separate billing of different classes of items. 

In connection with druggists' sundries, difficulty is ex- 
perienced with competition from jobbers of stationery and 
school supplies who also carry this item. The situation 
in this regard appears substantially as follows: The re- 
tailer has expanded his business to include side lines 
handled by other retailers also, and a similar change is 
noted in the wholesaler's business. The latter, however, 
in this development comes to handle certain lines which 
are distributed only to a small extent through the drug 
trade, and thus reaches out to sell these items to exclusive 
retailers as well as to retailers of drugs. In consequence, 
a measure of diversity is introduced into the terms on 
which merchandise is purchased by the wholesale druggist, 
which is reflected as well in the terms on which he sells. 
He therefore has undertaken, as in the case of stationery, to 
induce the members of the other industries to employ the 
regular drug terms of 1 per cent 10 days, net 30 days. 
In pursuance of this policy, a committee was appointed in 
1915, and reported in 1916 that since January 1 of that 
year many leading stationery houses had reduced their 
cash discount from 5 or 6 per cent to 2 per cent. Terms 
favored were 1 per cent 10 days, net 30 days, on the item, 
with the exception that where competition from wholesale 



360 THE MECHANISM OF COMMERCIAL CREDIT 

grocers, book, stationery and school-supply houses did not 
permit, 2 per cent might be granted. In 1917, employment 
of the regular terms was recommended on sundries ordered 
in the regular course of business, leaving it to the discretion 
of those who employed special salesmen to make the cash 
discount 2 per cent instead. 

As the retail drug trade is over-crowded, and there is 
a lack of financial responsibility on the part of its members, 
the enforcement of terms by wholesalers is rendered more 
difficult. It has been stated that 44.5 per cent of the 50,000 
retail druggists in the country have either no capital rating 
or one of not over $2,000, 23.5 per cent a rating of from 
$2,000 to $5,000, and 14 per cent a rating of from $5,000 
to $10,000. Ninety -two per cent of those in the first-men- 
tioned class have a second or third grade credit rating or 
no capital and credit rating at all, while 2/3 of those in the 
second class have a second or third grade credit rating. 
In 1919, it was estimated that of annual sales of $420,- 
000,000, wholesalers carried past due accounts of about 
$20,000,000. The practice of charging interest on past due 
balances, or the use of interest-bearing notes, has been 
consistently advocated. Interesting in this connection also 
are the following figures showing percentage loss by bad 
debts. 



States 

New England and Middle States 

Middle Western States 

Southern States 

Pacific Coast States 

General average 



1909 


1914 


0.37 


0.33 


.314 


.35 


.56 


.713 


.38 


.382 


.40 


.442 



1919 



0.172 
.219 
.248 
.16 
.2 



While all sections showed a considerable decrease, that 
for the South was particularly pronounced. As would be 
expected, the percentage of cash discounters has been in 



LUMBER AND MISCELLANEOUS INDUSTRIES 361 



the past relatively small, the average, in 1916, being re- 
ported as approximately 20 per cent, but there has been a 
substantial increase since that time. An indication of the 
change in the actual length of terms employed is afforded 
by the following figures of number of days' sales out- 
standing : 



States 

New England and Middle States 

Middle Western States 

Southern States 

Pacific Coast 

General average 



1909 



1914 



1919 



55 
43 
67 
52 

54 



53.7 

48.0 
68.0 
56.0 
55.2 



39.3 

37.8 
42.6 
40.5 
40.0 



The greatest decrease is again evident in the case of the 
Southern States. 

In view of the interest expressed by a few members, the 
National Wholesale Druggists Association appointed a 
special committee which carefully considered the trade ac- 
ceptance. A referendum vote was later held which, how- 
ever, "clearly demonstrated that the trade in general does 
not look with favor upon the use of the trade acceptance in 
the industry. ' ' 



s*S 



<j> oJ 



Q 

Oh 

Oh 



o £ 



S fl 8 



*5l 



S -SE 






ci 
h m a> 



IP 



»r O ^ 
•Sg-S 



*8 C 



*s- 



E-f3 



££ 






18- 






4»2' 






~2 



II 



o 

■la 
a 















2 ■§"§■§ a .SKI i 8 sal. |J^~£f 



§■ a" 

S «rS to 

I! i 












vw e$3 ft) 



J53 . 



oj +2 £ rt » 






r-l IN ►* ten i-(co' Xi S-2 C 'rt & * a2 £ £ «2 J2 C^^32; 






o6 oj 



CO 






O CO 

»eI 



!** Urn Ih*l3 lll£lllllil;l^ 



is 






Isliil .11 



S3 5 ^-"^ & S3 & * 2, >-. S &.p c +» s, m c oj g rt -^ o ^ <-' _ _, 




usaas 



„«■» ~,f,»j- u ftp g s . Si 



•2 rt"3 H g g w 
'' ,, "' w i> +;, co ww <3> 






£ B 



-8 _ 



B~« 
5S 















■ I'S^^i IS 

4 °eo *"" ' >* «5 <© ' 



B i 






ipili: S 



J 





'O 

O - 

CD 


H 


1. Leather 
(shoe soles) 
(12) (14) 
(24) (28) 
(31) (33) 




O 
00 

go 
. ® 
P. 


O 

IN 


U 

. -w 


1 


•6 

o 

CO 


H 


1. Bedding & 
pillow ma- 
terial 

2. Furniture 
(general) 

(less-than-car- 
load lots) 

3. Harness 
leather 

4. Upholstered 
furniture 
(most cases) 


O 

1 

6- 

o 


•6 
o 
eo 

1 

ft 


00 


1. Paper 
(wrapping) 
(who.) 
(12a) (26) 

2. Skirts 
(women's) 
(24) (51) 

3. Underwear 
(light weight) 
(who.) 

(4a) (5) (6) 
(15) (16) 
(48) (51) 


1 


13 

O 

•6 
or* 


t- 

H 


00 

s 

*s 


g 


o 
go» 

ft 


H 


1. Ooffee 
(green) 
(2) (14) 

2. Hosiery 

3. Silk 
(thrown) 

4. Underwear 
(general) 
(4a) (5) (6) 
(15) (18) 
(48) (51) 




-d 

P.® 


US 


1. Blankets 
(retail) 

2. Hosiery 
(heavy 

woolen) 
(3) (12) (13) 
(16) (33) 
(43) 
8. Merchandise 
(general) 
(used exten- 
sively) 

4. Nightwear 
(general) 
(13) (24) 

5. Shirts 
(work) 
(3) (11) 

6. Suspenders 
(jobbers) 

7. Underwear 
(cloth) 

(to wholesalers 
& retailers) 
(4a) (5) (6) 
(16) (18) 
(48) (51) 

8. White goods 
(14a) 




2 per cent lOd. 
Net 60d. 
(Oont.) 




15. Machine 
Tools 

16. Meats 
(smoked) 
(cured) 
(2) 

17. Office 
appliances 
(12) 

18. Paints 
(mixed) 
(4a) (12a) 

19. Shirtings 

20. Silk 

21. Shoes 

(to retailers) 
(3) (12a) 
(24) (33) 

22. Spices 

23. Stationery 

24. Tobacco 
(smoking) 
(twist) 
(Plug) 

25. Tubes 
(welded) 
(12a) 

26. Upholstery 
(auto) 

27. Varnishes 

& mixed paints 

28. White goods 
(15) 

29. Wire goods 
80. Yarn 



364 



•o 




fc 




© 




O 












73 

g® 




2° 




35 


ft 








°lc© 

. c <veo 




Cm 




H^"OV 




■*f 








73 




J2 




© 








«H 




00 > 

4> > /->^-s 




"S 
0) 

u 




fc'9 60^^'* «0 




co 




S3 




J 43 « g^-*rH© 
*-* CO > g«HC«N 

H 




Tfl 








*d 








© 








eo 












J-. 




§© 


r- 


<v 53 




"*> 


N 




^ V 




53 fl 




P. 




H S 




eo 








•6 

© 














-£ 




1-1 "o5 eo eo eo ** . . . .r-t 




C 

s 

o 

<U 


ce 




a 




.w^^w . rt^S 73^ 




W 






. 


73 








© 




73/~> 








OT3 




i 73 




o a> 




1! 




t*.S__ 

till 




& 










rH CN 




eo 








73 

© 




|| £ 




H 




«§■ s §5 § ^rp© Is «S, R ?s 

^ ^ £ l -> O «2 dT-tCNCCeO^rH^ £ CO rH ^ S .H 




§ 

a> 


01 






piei m ■* io <© 




eo 












03 e! 




5 




rt 




© 




« Co /-• 






m 


« 13 "5 'SS'-v 

™«s5 sis 




ft 










tH tN 




OJ 








73 








© 








© . 








73 
+s© 




fit 




C<N 








64 




P. 










rH 




<N 









365 



•o 




*o 




la 




A 








5 




8 


TO 


s| 




53 








IQ 








■6 








o 








^ 2 




M 








/-,/-, OS 

"Serial 

r> a e* as 6a 




u 


to 

CO 














tH <N 




1ft 








■6 




- 




%i 










CO 






1- 




^Is; 




^ 








>« 








o 




t 




IH 

gw 


^< 


|-b 




3) 


M 


'% z s^^ 






«siig 




21 




r-5 <N *"" 




O 








13 
O 
i-l 




t-I-'+j [*j .-1 CS ** ft r- 


?">ft^ S^usoo <3 r^oo© ^Jo) oJe* 
5 a -g <n r-t -* j-j g <n<nc* a^>T3^ <Nv - / 

M m o^co ©J Oio a *' h 5h c ^^** 


00 


u 

ft 




1-1 (N eo 


■* >o ' © 


lO 








73 








o 








® 




fcfi ^ £. ^ ^ 




1 




C <M OJ^M^ 






2 'a 13 S ^^^ 




o 


f: 


O £oig 0)00 04 

w £•*" brio-* 




I 
















r-l <N 




tH 








© 




3 C 000 




c 
o 






H 


s ft'i'^^^ 




ft 








■>* 








-6 








© 








rH eJ 








Si 


o 


las 




ca 


ft-- O 

^ lie? 












■* 













1. Gloves 

2. Hats 
(men's) 

3. Trousetfl 
(39) (49) 


1 .2 

Ih o 


to 


»* « eo ■* 


6 per cent 

lOd. 
Net 30d. 


*< 


a 
I 


ft- 

(0 


co 


£^£^ Ort* b^»OM J 00<M 
^ C W C CO w txco ^ CJQCO rl iH ^ "" CO Tf 

h ei eo* «* " W iq^ 3 


4a 

S.SS 


<* 


sis*!! a 


"S .8 

fe do 


■* 


- ' co cq j, G j 
C 5 C K 'S'S _ 


^ 18 


O 


si 

i-5 


t- o 
ft 

■a 


eo 




5 per cent 
30d. 


CO 

co 


M) - ■ 

s 8^1 Hi .il Instil 



367 



s=> . 

o 

© CO 


U5 


1. Piece 
goods 
(woolen) 
(50) 


ftr-t 

O 


«* 


OB 

t- ft,- 4) 

- c c c^ 
D S «2 g<N 


o 

ft 

OS 


oc 


c £i-cocs> 

■H c4 


C 

ft' 

co 


ua 


111- 


a 

§ • 

*.© 
ft^ 
CO 


>o 






c 
■c 


■8 

B 

.S "O /-» ° <o 
- CO 5 * o 
. M^ . £ 
rl CM 


§ 

HO 

4> rl 
ft 


ee 


™ £- <m O c ^ s^ &. £ rt rt ~ x 2 eS « w « fe C » 
^ fcee^ iTrtK k ^i->^ Baoa rt S ^ bew ^ ^ r* <x> 

,_; csi cc •* »d w r~c© 


1 1 

S • « 

ft tr 


00 


■Ss.ig-Sssc 


per cent 
lOd. to 30d. 

Net 4 mo. 


-r 


OS 

as'O.M 
t. as fc. 



INDEX 1 



Acceptance Bulletin, 128, 135. 

Agger, E. E., 118, 161, 181. 

Agricultural implements, 33, 55, 
59, 60, 151, 242. 

Agricultural produce, 39, 46, 
47, 48, 102. 

Alexander Hamilton Institute, 
Modern Business Series, 
12. 

Allied Council of the American 
Shoe and Leather Indus- 
tries and Trades, 327. 

American Acceptance Council, 
114, 115, 126, 127, 128, 
135. 

American Bankers Association, 
122, 123, 124, 125. 

American Bankers Association, 
Journal, 126, 132, 140. 

American Business and Na- 
tional Acceptance Journal, 
128. 

American Hardware Manufac- 
turers Association, 130, 
215, 217. 

American Institute of Banking, 
126. 

American Lumber Congress, 
11, 332. 

American Trade Acceptance 
Council, 114, 115, 122, 123, 
124, 125, 126, 127, 132, 
133, 141, 143. 



Anticipation rates, 86. 

Auto tires. See Rubber goods. 

Automatic elasticity of paper, 

177. 
Automobile accessories, 51, 240. 
Automobiles, 20, 54, 233. 

Ball, S. Y., 20, 21, 23, 42, 346. 

Bankers and the trade accep- 
tance, 124. 

Banking, 8, 9, 30, 74. 

Banking Law Journal Year 
Book, 12. 

Bean, R. H., 127, 128, 140. 

Blankets, 284. 

Bonham, W..M., 43, 171, 177. 

Boots and shoes, 58, 106, 325. 

Bureau of Foreign and Domes- 
tic Commerce, Miscellane- 
ous Series, 13, 286, 306, 
342. 

Business Bourse, 141, 143. 

Business character and terms, 
47. 

Business cycle, 89. 

Business practice, 173. 

Buyer vs. seller, 39, 45. 

Calkins, J. U., 120. 

Canned goods, 20, 53, 63, 64, 

102, 190. 
Canners' League of California, 

192. 

* References in index set in bold-face type refer to section on the 
subject indexed. 



370 



INDEX 



Cannon, J. G., 125. 

Capital position of seller, 43, 

80. 
Carpets and rugs. See Floor 

coverings. 
Cash Discount, Chapter V. 
function, 73. 
methods of quoting, 76. 
nature, 71. 
. relation to terms, 72. 

size, 78. 
Cash discount and selling price, 

180. 
Cash discount period, 75. 
Cash discount system, 144, 154, 

159. 
Cash outlay, 42. 
Cement, 76. 
Chamber of Commerce of the 

United States, 122, 132, 

133. 
Cherington, P. T., 13, 268, 304. 
Chicago Board of Trade, 47. 
City vs. country trade, 23. 
Classes of goods, 17, 19, 22, 62. 
Cleveland Chamber of Com- 
merce, 128. 
Closing a transaction at once, 

174. 
Coal and coke, 26, 41, 46, 62, 

77, 81, 92, 257. 
Coffee, 40, 73, 77, 197. 
Collection of accounts, 169. 
Commercial credit system, 5, 

Chapters IX, X. 
Commissioner of Corporations, 

242. 
Competitive conditions, 38, 79. 
Competitive discounts, 83. 
Composition of the business 

community, 175. 
Confectionery, 20, 68, 198. 



Consignment business, 32. 
Copper, 46, 54, 80, 210. 
Cotton, 25, 269. 
Credit measurement. 

agency for, 158. 

in different types of indus- 
tries, 164. 

method of, 166. 

seller vs. bank, 160. 
Credit Men's Diary, 362. 
Credit Monthly, 12, 121. 
Curtiss, F. H v 119. 
Customary settlement dates, 24. 

Datings, Chapter IV. 

competitive, 65. 

extra, 65. 

indirect, 63. 

season, 36, 56. 
Department store discounts, 84. 
Discount market, 181. 
Discounts and business condi- 
tions, 92. 
Dodd, C. H., 13, 335. 
Drafts, use of, 53. 
Drugs and medicines, 51, 52, 

98, 355. 
Dry goods (wholesale), 56, 57, 
60, 63, 64, 65, 95, 105, 290. 
Dupuis, C. W., 124. 

E. O. M. terms, 68. 
Economic process, 6, 7. 
Electrical products, 150, 254. 
Ettinger, R. P. & Golieb, D. E., 
64. 

Farm lands, 24. 

Federal Reserve Act, 115, 116, 

117, 120, 136. 
Federal Reserve Agents, 140, 

141. 



INDEX 



371 



Federal Reserve Bank, 117, 118, 

119, 120, 136, 137, 138. 
Federal Reserve Board, 116, 

117, 118, 119, 123, 134, 

136, 141, 142, 143. 
Federal Reserve Bulletin, 14, 

129. 
Federal Trade Commission, 13, 

46, 120, 191, 242, 243, 258, 

262, 321. 
Fernley, T. A., 95, 97. 
Finance, 

fundamental tests, 157. 
system of, 153. 
Fixed capital goods, 26, 27. 
Floor coverings, 51, 65, 284. 
Flour, 25, 53, 77, 150, 192. 
Folding Box Manufacturers' 

National Association, 353. 
Foodstuffs, 22, 67. 
Forgan, J. B., 125. 
Frequency of purchases, 62. 
Furs, 314. 

General business conditions, 89, 
94. 

General prices, 179. 

Geography of terms, 24, 52,59, 64. 

Glass and glassware, 341. 

Gloves, 36. 

Graded discounts, 84. 

Groceries (wholesale), 10, 23, 
25, 41, 42, 52, 68, 75, 76, 
77, 82, 95, 98, 99, 100, 101, 
102, 104, 105, 106, 107, 108, 
150, 200. 

Grouping of transactions, 67. 

Harding, W. P. G., 134. 

Hardware, 24, 27, 41, 43, 51, 
63, 64, 80, 82, 97, 98, 99, 
103, 104, 105, 107, 108, 
109, 165, 170, 171, 215. 



Harris, B. D., 125. 

Harvard University, Bureau of 

Business Research, 196, 

205. 
Hayes, E. B., 133. 
Hides, 49. 
High discounts, 83. 
Hirsch, J., 133. 
Holdsworth, J. T., 124, 133. 
Hooker, K. T., 133. 
Hosiery, 42, 285. 

Installments, 26, 27. 
International Harvester Co., 

245. 
Iron and steel, 10, 40, 80, 98, 

209. 

Jay, P., 119. 

Jenks, J. S., Jr., 132, 133, 141, 

144. 
Jenks, J. W., and Clark, W. E., 

40. 
Jenks bill, 132, 169. 
Jewelry, 20, 21, 23, 42, 54, 105, 

151, 164, 343. 
Johnston, P. H., 127. 

Kent, F. I., 127. 
Kingsbury, I. D., 84, 307. 
Kniffin, W. H., 12. 

Lace and Embroidery Associa- 
tion, 289. 

Laces and embroideries, 288. 

Large markets and terms, 
41. 

Lead, 42, 54, 79, 98, 210. 

Leather, 37, 49, 51, 60, 65, 319. 

Letts, F. C, 100. 

Lichty, G. E., 108. 

Line of credit system, 166. 



372 



INDEX 



Low discounts, 82. 
Lumber, 41, 54, 75, 102, 103, 
151, 332. 

Machine tools ("machinery"), 
26, 28, 43, 80, 103, 224. 

Machinery, 26, 27, 28, 29, 55, 
81, 227. 

Marketing" period, 18, 30, 57, 

66, 78. 
Marketing system, 30, 60. 
Mathewson, P., 141, 148. 
Meats, 20, 22, 23, 37, 61, 68, 

98, 188. 

Men's clothing, 59, 65, 82, 84, 
304. 

Men's hats, 10, 22, 25, 26, 61, 
62. 

Merchants' Association of New 
York, 118. 

Mill supplies, 43, 80, 224. 

Millinery, 63, 67, 81, 316. 

Millinery Chamber of Com- 
merce of the United States, 

67, 317. 

Millinery Jobbers' Association, 

317, 318, 319. 
Minnesota "Wholesale Grocers' 

Association, 52. 
Mitchell, W. C, 89. 
Montana Wholesale Grocers' 

Association, 52. 
Moulton, H. G., 179. 
Mutual interrelation of terms, 

50. 

National Association of Cloth- 
iers, 84. 

National Association of Credit 
Men, 13, 114, 120, 121, 
122, 123, 127, 136, 141, 
143, 156, 252. 



National Association of Credit 
Men, Bulletin, 12, 121, 133. 

National Association of Hard- 
ware Retailers, 103. 

National Association of Hos- 
iery and Underwear Manu- 
facturers, 286. 

National Association of Manu- 
facturers, 123, 141. 

National Canners' Association, 
190. 

National Coffee Roasters' Asso- 
ciation, 131. 

National Hardware Associa- 
tion, 99, 105, 130, 150, 216, 
219, 221. 

National Implement and Ve- 
hicle Association, 59, 244, 
247, 251. 

National Millinery Association, 
317, 318. 

National Paper Box Associa- 
tion, 353. 

National Trade Acceptance 
Bureau, Inc., 128. 

National Wholesale Druggists' 
Association, 358, 361. 

National Wholesale Dry Goods 
Association, 64, 71, 95, 
105, 292, 294. 

National Wholesale Grocers' 
Association, 104, 105, 106, 
107, 141, 190, 200, 201, 
203. 

National Wholesale Jewelers' 
Association, 20, 105, 345, 
346. 

National Wholesale Lumber 
Dealers' Association, 54, 
71, 75, 102, 336, 338. 

Nature of the article, 19, 62. 

Necessities vs. luxuries, 22. 



INDEX 



373 



Net period, how covered, 53. 

Net terms, 81. 

Net terms system, 154, 159. 

New York City Garment Con- 
ference Council of Whole- 
salers and Retailers, 53, 
70, 312. 

New York Clearing 1 House As- 
sociation, 118. 

New York Lumber Trade As- 
sociation, 337. 

Nones, W. M., 133. 

North Dakota Wholesale Gro- 
cers' Association, 52. 

Notes, use of, 29, 54. 

Office furniture, 338. 

One-season industries, 60. 

Onthank, A. H., 13, 320. 

Open account, 53. 

Open market terms, 46. 

Optical merchandise, 50, 51, 
348. 

Orr, W. W., 123, 125, 134. 

Outstandings of wholesale gro- 
cers, 100. 

Paine, G. H., 132, 141, 144. 
Paint and varnish, 50, 57, 58, 

340. 
Paint and Varnish Credit Club, 

57. 
Paper. See Wood pulp and 

paper. 
Past-due rates, 86. 
Pay-day terms, 23. 
Perishability of articles, 20, 62. 
Petroleum, 36, 102, 262. 
Pierson, L. E., 123, 125, 127, 

131, 133. 
Prendergast, W. A., 56, 65. 
Price differentials, 76. 



Prices of particular goods, 179. 
Profits margin, 43, 81, 108. 
Proximo terms, 68. 

Railway equipment, 28, 42, 43, 

81, 229. 
Ramsey, W. F., 119. 
Rate of consumption, 19. 
Raw materials, 25. 
Raw Ostrich Feather Importers' 

Association, 319. 
Recommended terms, 102. 
Relation of the borrower to 

the bank, 176. 
Retail trade, 29. 
Reynolds, A., 127. 
Rindsfoos, C. S., 12. 
Robert Morris Associates, 13. 
Rubber goods, 22, 32, 55, 61, 

68, 82, 240. 

Sands, O. J., 114. 

Scales, J. H., 133. 

Seasonal vs. current use, 22, 35, 
36. 

Shipments to distant terri- 
tories, 64. 

Ships, 27, 29, 81, 230. 

Shortening of terms, 94, 98. 

Silk, 25, 85, 86, 102, 274. 

Silk Association of America, 
85, 275, 277, 278. 

Simmons, W. D., 131, 133. 

Size of article, 20. 

Southern Wagon Manufac- 
turers' Association, 248. 

Southern Wholesale Dry Goods 
Association, 105, 150, 292, 
293, 294. 

Sparling, W. L., 128. 

Spices, 40, 197. 

Sporting goods, 224. 



374 



INDEX 



Sprague, O. M. W., 118. 
Standardization of articles, 

21. 
Standardization of terms, 41, 

101. 
State Council of Defense of 

Washington, 95. 
Stationery, 52. 
Steiner, W. H., 30, 168. 
Stix, S. L., 131, 133. 
Store fixtures, 339. 
Sugar, 33, 40, 77, 106, 196. 
Sullivan, J. J., 133, 144, 146. 

Tea, 40, 73, 197. 

Terms in particular industries, 

91. 
Terms of sale, meaning, 3. 
Terms of the individual house, 

52. 
Textiles, 10, 47, 68, 73, 83, 95, 

150, 178. 
Thralls, J., 123, 124, 125, 

127. 
Thrasher Manufacturers' Asso- 
ciation, 250. 
Tobacco, 44, 45, 49, 50, 54, 55, 

68, 77, 151, 199. 
Trade acceptance, 
abuse of, 135. 
definition, 113. 
history, 115. 
meaning, 113. 
movement, Chapter VII. 
present use, 149. 
rates on, 136. 
surveys, 140. 
system, 155. 
use of, 55. 
Trade Acceptance Journal, 128. 
Trade associations and terms, 
102. 



Trade associations and the 

trade acceptance, 128. 
Trade discount, 69, 70, 71, 82, 

83. 
Trade-marked goods, 44. 
Trading jobber, 37, 45. 
Tregoe, J. H., 123, 133. 
Treman, R. H., 108, 113, 119, 

123, 124, 130, 170, 217, 

220. 



Underwear, 63, 95, 287. 
Uniformity of terms, 41, 101. 
Utah-Idaho Wholesale Grocers' 
Association, 101. 

Veblen, T., 89. 

Wagner, E. C, 127. 

Wall Paper Manufacturers' As- 
sociation, 55. 

War Convention of American 
Business, 122. 

Warburg, P. M., 119, 127, 
134. 

Wartime changes in terms, 
94. 

Wholesaler, 7, 34, 49, 51, 96, 
103. 

Wholesalers and the trade ac- 
ceptance, 131. 

Whyte, J., 362. 

Willis, H. P., 116, 117, 119, 
136. 

Wills, D. C, 119, 128, 133, 
136. 

Wilmot, W. W., 128, 141, 144. 

Women's outer garments, 21, 
47, 53, 57, 59, 70, 71, 78, 
84, 309, 



INDEX 



375 



Wood pulp and paper, 55, 61, 

62, 349. 
Woodruff, G., 124, 133. 
Woolens and worsteds, 53, 57, 

70, 83, 85, 86, 87, 97, 99, 

279. 



Woolens and worsteds, men's 
wear (jobbing), 31, 32, 
45, 46, 300. 

Working capital sources, 4, 5. 

Zinc, 42, 46, 54, 82, 92, 210. 



(i) 




021 183 178 8 



m 



■ iiill 




IMlU 



■ 



ill 



RBiiillnlHi 
■fflBDr 



in 



vm 



III 



■ 
Up" 



■L 



HI 



I 



uhuuii 



